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Hexaware ------------------------------------------------------------------- Maintain UNDERPERFORM
Strong business momentum priced in
● Hexaware reported strong Dec-10 revenue growth of 9% QoQ in
US$ terms, ahead of CS estimate of 8.1%. Its EBIT margin
improved 290 bp QoQ (vs CS estimate of a 90 bp increase). Thus,
PAT came in 16% ahead of estimate.
● Management was positive on the growth outlook and guided for
2011 sales of US$290 mn, 25% YoY growth. We believe that
strong growth is driven largely by a resurgence in the Peoplesoft
business.
● The company has guided for EBIT margin of over 10% in 2011. It
expects margin improvement to be driven by: 1) more offshoring,
2) higher utilisation, 3) pyramidisation and 4) pricing improvement.
● While growth is not in doubt, margin performance could be the key
to its share price performance in 2011. Despite a YoY
improvement, margin guidance falls short of our estimate and the
last five years’ average. We believe that this could keep its share
price under pressure.
● Post results, we increase our FY11 revenue estimate but lower
our margin numbers, leading to a 7% decline in our 2011E EPS.
We increase our target price to Rs100 (10x 2011E P/E) and
maintain our UNDERPERFORM rating.
Strong results
Hexaware reported strong Dec-10 revenue growth of 9.0% QoQ (in
US$ terms), vs our expectation of 8.1% and the top end of its
guidance of 6.4%. Its EBIT margin improved 290 bp QoQ vs our
estimate of a 90 bp improvement. This primarily led to its PAT coming
in 16% ahead of our estimate of Rs396 mn.
SG&A leverage (200 bp) and improvement in bulge (90 bp) were the
primary drivers of its EBIT margin improvement in the quarter.
Growth momentum could continue
The company has guided for 2011 revenue of at least US$290 mn,
implying growth of at least 25%. Management explained that it has
been able to successfully position itself as a premier provider of
services in its focus horizontals such as Peoplesoft, Testing and focus
verticals of capital markets and airlines.
Positive margin outlook
Management has guided for an EBIT margin of over 10% in 2011
(fiscal year ending December). It expects margin improvement to be
driven by: 1) increased offshoring from current levels of 40% of
revenue; 2) increasing utilisation from current levels of 69%; 3)
employee pyramidisation – the company had hardly hired freshers in
2008 and 2009 (during the financial crisis) and as a result, it had
significant scope to improve bulge; and 4) pricing improvement –
which could be pushed through in an environment of strong demand.
Maintain UNDERPERFORM
Given the strong environment, we are not worried about revenue
growth in our coverage universe. Instead, the key challenge for
smaller companies in the current year could be their ability to maintain
margins. Hexaware’s 10% EBIT margin guidance for 2011 is an
improvement over the current year but still below its last five years’
average of more than 11%. A change in our margin estimates thus
lead to a downward revision to our 2011 EPS estimate.
The small cap universe in our coverage is trading at a P/E of 8-12x.
We value Hexaware at the middle of that range and find a multiple of
10x reasonable. We thus raise our target price to Rs100 and maintain
our UNDERPERFORM rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hexaware ------------------------------------------------------------------- Maintain UNDERPERFORM
Strong business momentum priced in
● Hexaware reported strong Dec-10 revenue growth of 9% QoQ in
US$ terms, ahead of CS estimate of 8.1%. Its EBIT margin
improved 290 bp QoQ (vs CS estimate of a 90 bp increase). Thus,
PAT came in 16% ahead of estimate.
● Management was positive on the growth outlook and guided for
2011 sales of US$290 mn, 25% YoY growth. We believe that
strong growth is driven largely by a resurgence in the Peoplesoft
business.
● The company has guided for EBIT margin of over 10% in 2011. It
expects margin improvement to be driven by: 1) more offshoring,
2) higher utilisation, 3) pyramidisation and 4) pricing improvement.
● While growth is not in doubt, margin performance could be the key
to its share price performance in 2011. Despite a YoY
improvement, margin guidance falls short of our estimate and the
last five years’ average. We believe that this could keep its share
price under pressure.
● Post results, we increase our FY11 revenue estimate but lower
our margin numbers, leading to a 7% decline in our 2011E EPS.
We increase our target price to Rs100 (10x 2011E P/E) and
maintain our UNDERPERFORM rating.
Strong results
Hexaware reported strong Dec-10 revenue growth of 9.0% QoQ (in
US$ terms), vs our expectation of 8.1% and the top end of its
guidance of 6.4%. Its EBIT margin improved 290 bp QoQ vs our
estimate of a 90 bp improvement. This primarily led to its PAT coming
in 16% ahead of our estimate of Rs396 mn.
SG&A leverage (200 bp) and improvement in bulge (90 bp) were the
primary drivers of its EBIT margin improvement in the quarter.
Growth momentum could continue
The company has guided for 2011 revenue of at least US$290 mn,
implying growth of at least 25%. Management explained that it has
been able to successfully position itself as a premier provider of
services in its focus horizontals such as Peoplesoft, Testing and focus
verticals of capital markets and airlines.
Positive margin outlook
Management has guided for an EBIT margin of over 10% in 2011
(fiscal year ending December). It expects margin improvement to be
driven by: 1) increased offshoring from current levels of 40% of
revenue; 2) increasing utilisation from current levels of 69%; 3)
employee pyramidisation – the company had hardly hired freshers in
2008 and 2009 (during the financial crisis) and as a result, it had
significant scope to improve bulge; and 4) pricing improvement –
which could be pushed through in an environment of strong demand.
Maintain UNDERPERFORM
Given the strong environment, we are not worried about revenue
growth in our coverage universe. Instead, the key challenge for
smaller companies in the current year could be their ability to maintain
margins. Hexaware’s 10% EBIT margin guidance for 2011 is an
improvement over the current year but still below its last five years’
average of more than 11%. A change in our margin estimates thus
lead to a downward revision to our 2011 EPS estimate.
The small cap universe in our coverage is trading at a P/E of 8-12x.
We value Hexaware at the middle of that range and find a multiple of
10x reasonable. We thus raise our target price to Rs100 and maintain
our UNDERPERFORM rating.
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