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Hexaware Technologies (HEXW)
Technology
Ends CY2010 on a high; well-placed for a strong CY2011E. BUY. Sustaining the
regained business momentum, Hexaware delivered another quarter of strong revenue
growth (+9% qoq in US$ terms). More importantly, operating leverage has started
reflecting in margins – EBITDA margin was up 300 bps qoq. We maintain our thesis on
IT mid-caps – Hexaware meets our criteria of good volume outlook, low risk to margins,
and reasonable valuations. Raise estimates and reiterate BUY. TP revised to Rs135.
Solid quarter – maintains momentum, beats expectations
Hexaware reported revenues of US$66.6 mn for Dec 2010 quarter, ahead of its US$64-65 mn
guidance and 1.7% higher than our estimate. We note that this is on the back of strong 13% and
11% sequential revenue growth in the past two quarters, suggesting at least a sense of
sustenance in the ongoing business turnaround. More importantly, strong growth in margins for
the second consecutive quarter (+300 bps qoq in Dec 2010 quarter after a 170 bps sequential
jump in the previous quarter) reflects strong operating leverage. EBITDA margins for the quarter at
11.5% were 160 bps ahead of our estimate. Net income of Rs396 mn was 37% higher than our
estimate driven by EBITDA beat as well as higher-than-expected forex gains.
Business turnaround remarkable; revenue recovery has legs and margins may have bottomed
Hexaware found itself in more than a spot of bother in CY2008-09 timeframe – it lost its earlier
CEO, bought itself a forex mess and business was hit severely by the global financial crisis given its
disproportionate exposure to discretionary spend areas. Even as economic recovery and IT spend
pick-up has helped, we believe the new management has done a creditable job in turning around
the business over the past 12 months.
We find the revenue performance over the past three quarters comforting and believe that the
revenue recovery story for the company has legs (barring a macro shock scenario) – management’s
indication of at least 25% yoy growth in CY2011E, while conservative in our view, is reassuring as
well. Our revenue growth forecast for CY2011E is higher at 32%.
In addition, we believe that EBITDA margins for the company may have bottomed out in CY2010
(8.9%) and should trace their way back to the historical average levels of 13-14% over the next
two years. We build in an OPM of 12.9% for CY2011E.
Our sector Tier-I bias stays; Hexaware the only mid-cap BUY
Even as we retain our Tier-I bias to play the sector, we remain BUYers on Hexaware. The stock
meets our three requisites from mid-cap – (1) robust volume outlook, (2) low risk to margins, and
(3) reasonable valuations (<10X CY2011E P/E). Revise our TP to Rs135/share (from Rs125). BUY.
Raise earnings estimates
We have raised our CY2011E and CY2012E EPS estimate for Hexaware to Rs11.3 and Rs13
from Rs10.4 and Rs12, respectively. Earnings upgrade is driven by ~3% revision in US$
revenue estimates and +20-50 bps revision in EBITDA margin estimates for CY2011/12E. We
raise our target price on the stock to Rs135/share from Rs125 earlier, maintaining our target
multiple of 12X CY2011E EPS.
Key highlights from the results and analyst meet
Strong 5% qoq US$ revenue growth guidance for the Mar 2011 quarter (to US$70 mn).
Indicates at least 25% yoy US$ revenue growth for CY2011E. We note that this implies a
modest 2.3% CQGR over 2Q-4QCY11E assuming the company meets its Mar 2011
revenue guidance. We find the CY2011E revenue indication conservative.
Net headcount addition of 203 for the quarter, taking CY2010 net adds to 1,374. The
company has shared a hiring guidance of 1,500 for CY2011E with a target of nearly 50%
fresher additions.
Attrition remained steady at 19.6% for the quarter.
Growth in the Dec 2010 quarter was driven by top-5 clients. The company now has 2
US$20 mn+ (LTM billing) clients, up from zero in the previous quarter.
Onsite billing rate was flat qoq while offshore rates were up 1.7% qoq.
DSO declined to 59 days from 63 days in the previous quarter. Cash and equivalents at
end-Dec 2010 were Rs4.8 bn, 30% of the current market cap of the company.
Management identified the following growth drivers for CY2011E – (1) top-25 accounts;
CY2010 growth was driven primarily by top-10 client relationships, (2) broad-based
geographical growth with strong traction in non-US geographies as well, and (3)
aggressive and smart sales and marketing push.
Management sees the following key margin levers for CY2011E – (1) offshore leverage –
Hexaware’s onsite:offshore mix of 60:40 does not compare favorably with larger peers
and has room for improvement, (2) SG&A leverage – revenue growth led; the company
indicated that it does not foresee a sharp increase in SG&A expenses on an absolute basis,
and (3) broadening of employee pyramid. The company does not see utilization
improvement as a major focus area as thrust remains on growth and the supply-side
situation remains challenging.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hexaware Technologies (HEXW)
Technology
Ends CY2010 on a high; well-placed for a strong CY2011E. BUY. Sustaining the
regained business momentum, Hexaware delivered another quarter of strong revenue
growth (+9% qoq in US$ terms). More importantly, operating leverage has started
reflecting in margins – EBITDA margin was up 300 bps qoq. We maintain our thesis on
IT mid-caps – Hexaware meets our criteria of good volume outlook, low risk to margins,
and reasonable valuations. Raise estimates and reiterate BUY. TP revised to Rs135.
Solid quarter – maintains momentum, beats expectations
Hexaware reported revenues of US$66.6 mn for Dec 2010 quarter, ahead of its US$64-65 mn
guidance and 1.7% higher than our estimate. We note that this is on the back of strong 13% and
11% sequential revenue growth in the past two quarters, suggesting at least a sense of
sustenance in the ongoing business turnaround. More importantly, strong growth in margins for
the second consecutive quarter (+300 bps qoq in Dec 2010 quarter after a 170 bps sequential
jump in the previous quarter) reflects strong operating leverage. EBITDA margins for the quarter at
11.5% were 160 bps ahead of our estimate. Net income of Rs396 mn was 37% higher than our
estimate driven by EBITDA beat as well as higher-than-expected forex gains.
Business turnaround remarkable; revenue recovery has legs and margins may have bottomed
Hexaware found itself in more than a spot of bother in CY2008-09 timeframe – it lost its earlier
CEO, bought itself a forex mess and business was hit severely by the global financial crisis given its
disproportionate exposure to discretionary spend areas. Even as economic recovery and IT spend
pick-up has helped, we believe the new management has done a creditable job in turning around
the business over the past 12 months.
We find the revenue performance over the past three quarters comforting and believe that the
revenue recovery story for the company has legs (barring a macro shock scenario) – management’s
indication of at least 25% yoy growth in CY2011E, while conservative in our view, is reassuring as
well. Our revenue growth forecast for CY2011E is higher at 32%.
In addition, we believe that EBITDA margins for the company may have bottomed out in CY2010
(8.9%) and should trace their way back to the historical average levels of 13-14% over the next
two years. We build in an OPM of 12.9% for CY2011E.
Our sector Tier-I bias stays; Hexaware the only mid-cap BUY
Even as we retain our Tier-I bias to play the sector, we remain BUYers on Hexaware. The stock
meets our three requisites from mid-cap – (1) robust volume outlook, (2) low risk to margins, and
(3) reasonable valuations (<10X CY2011E P/E). Revise our TP to Rs135/share (from Rs125). BUY.
Raise earnings estimates
We have raised our CY2011E and CY2012E EPS estimate for Hexaware to Rs11.3 and Rs13
from Rs10.4 and Rs12, respectively. Earnings upgrade is driven by ~3% revision in US$
revenue estimates and +20-50 bps revision in EBITDA margin estimates for CY2011/12E. We
raise our target price on the stock to Rs135/share from Rs125 earlier, maintaining our target
multiple of 12X CY2011E EPS.
Key highlights from the results and analyst meet
Strong 5% qoq US$ revenue growth guidance for the Mar 2011 quarter (to US$70 mn).
Indicates at least 25% yoy US$ revenue growth for CY2011E. We note that this implies a
modest 2.3% CQGR over 2Q-4QCY11E assuming the company meets its Mar 2011
revenue guidance. We find the CY2011E revenue indication conservative.
Net headcount addition of 203 for the quarter, taking CY2010 net adds to 1,374. The
company has shared a hiring guidance of 1,500 for CY2011E with a target of nearly 50%
fresher additions.
Attrition remained steady at 19.6% for the quarter.
Growth in the Dec 2010 quarter was driven by top-5 clients. The company now has 2
US$20 mn+ (LTM billing) clients, up from zero in the previous quarter.
Onsite billing rate was flat qoq while offshore rates were up 1.7% qoq.
DSO declined to 59 days from 63 days in the previous quarter. Cash and equivalents at
end-Dec 2010 were Rs4.8 bn, 30% of the current market cap of the company.
Management identified the following growth drivers for CY2011E – (1) top-25 accounts;
CY2010 growth was driven primarily by top-10 client relationships, (2) broad-based
geographical growth with strong traction in non-US geographies as well, and (3)
aggressive and smart sales and marketing push.
Management sees the following key margin levers for CY2011E – (1) offshore leverage –
Hexaware’s onsite:offshore mix of 60:40 does not compare favorably with larger peers
and has room for improvement, (2) SG&A leverage – revenue growth led; the company
indicated that it does not foresee a sharp increase in SG&A expenses on an absolute basis,
and (3) broadening of employee pyramid. The company does not see utilization
improvement as a major focus area as thrust remains on growth and the supply-side
situation remains challenging.
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