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Volumes surge and so do margins
Hexaware Technologies’ (Hexaware) Q4CY10 results clearly vindicate our margin
improvement thesis with continuing revenue momentum. Significant growth over
the past two quarters (double digit) has once again been supported by 9% USD
growth during the quarter. Volume growth of 8% Q-o-Q was driven by scale-up
from large client accounts. Importantly, the company’s operating margins
(EBITDA) improved by an impressive 300bps sequentially to 11.5% led by better
cost optimisation. Net profit was further boosted by higher hedging gain and yield
on free cash. Overall, Q4CY10 results indicate that 2011 is expected to be a
strong growth year with growth vectors and margin levers in place.
Revenue outlook on an uptrend
Hexaware is confident of achieving atleast USD 290 mn revenue for CY11E on
back of deal wins in the past one year and the strong deal pipeline being
pursued,. This implies 25% growth over CY10 and 5.8% CQGR through CY11.
Improved traction in Europe and better visibility in APAC region is driving this
confidence.
Investments in sales and account managers yielding results
Hexaware has been investing in account management and field force. It has
appointed dedicated account managers for its top 25 clients, the result of which
is evident in Q4CY10 numbers. Further, with vertical and horizontal specialist
sales people, cross selling within clients should benefit the company. The
company is confident that it will be able to scale 8-9 of 45 clients added last year
to over USD 1mn in CY11 itself.
Operating margin to continue northward journey
With levers such utilisation (69.4%), broadening employee pyramid, offshore
shift, and SG&A leverage, we anticipate EBITDA margin to improve to 14% plus
by Q4CY11E. This will imply a 450bps improvement for CY11 at 13.3% over
CY10, despite salary hikes for CY11 and higher cost of lateral additions.
Outlook and valuations: Growth and margin vectors in place; maintain
‘BUY’
Over the past three quarters, we believe Hexaware has delivered consistent
performance exhibiting fundamental strength. Further, with improved demand
outlook and margin levers in place we revise our CY11 and CY12 EPS estimate
upwards by 12.5% and 7.9% to INR 11.5 and INR 13.9, respectively. At CMP of
INR 111, the stock trades at a P/E of 13.9x and EV/EBITDA of 5.4x on CY11E.
We maintain our ‘BUY/ Sector Performer’ recommendation/rating on the
stock.
Key highlights
• Strong sequential revenue growth: Revenue, at USD 66.6 mn (INR 3 bn), was
ahead of our estimate (USD 65.3 mn), up 9.0% Q-o-Q, primarily driven by strong
volume growth of 8% Q-o-Q.
• Gross profit, at INR 1.0 bn, jumped 9.7% Q-o-Q. Gross margin for the quarter
jumped 100bps Q-o-Q and stood at 34.5% after declining for the past four quarters.
• EBITDA for the quarter, at INR 240 mn, jumped 43.8% Q-o-Q primarily on account
of higher gross margins and lower SG&A spend, while EBITDA margin stood at
11.5%, up 300bps Q-o-Q. Key to note is that EBITDA margin has expanded 470bps
over the past two quarters.
• Net profit, at INR 396 mn, (INR 168 mn in Q3CY10 excluding exceptional gains),
were higher due to percolation of operating margin and forex gain of INR 95 mn
(loss of INR 76 mn in Q3CY10). Net profit margin stands at 13.2%.
• Strong Q1CY11 guidance: Revenue guidance for Q1CY11 is at USD 70 mn (5.1%
Q-o-Q growth). Management expects demand momentum to continue in CY11 and
expects revenue to be at least USD 290 mn, implying growth of 25.4% over CY10.
• Healthy client addition: Hexaware added 11 new clients during the quarter, of
which four each are from America and Europe. Total active clientele is now at 174
against 167 in the previous quarter.
• Client metric: Revenue growth of 9.0% was driven by strong growth from top 5 and
10 clients with a 11.9% and 9.0% sequential increase, respectively. Hexaware's
largest client was down 3.0% Q-o-Q on the back of 41.1% sequential growth in the
previous quarter.
• Broad-based vertical performance: During the quarter, growth was driven by
BFSI, which grew 12.1% Q-o-Q. Travel & transportation and emerging segments
(mfg & healthcare) grew 4.1% and 9.3% Q-o-Q, respectively.
• Momentum continues in EAS and business intelligence: During the quarter, EAS
and ADM grew 8.6% and 2.6%, Q-o-Q, respectively. Business intelligence & analytics
and testing also posted strong growth of 19.4% and 38.9% Q-o-Q, respectively,
albeit on a smaller base.
• Employee additions: The quarter saw net employee addition of 203 on the back of
277 employees in the previous quarter. The total employee count now stands at
6,511. Management has indicated it will add 1,500 employees in CY11.
• Utilisation for the quarter soared 90bps to 69.4% from 68.5% in Q3CY10.
• Annualised attrition stands at 19.6% versus 19.9% in the previous quarter.
• Geo split: North America (13.7%) and ROW (17.2%) posted positive growth during
the quarter while Europe declined 4.0% sequentially.
• Hedging: Hexaware has hedges worth USD 130.5 mn (at an avg. rate of INR 48.25)
for the subsequent eight quarters and EUR 15.8 mn (at hedge rate of INR 72.13),
maturing in December 2012.
• DSO decreased from 63 days (in Q3CY10) to 59 days in the current quarter.
• Current cash and equivalents position stands at INR 4.6 bn, translating into INR 32
per share (~29% of current market price).
Company Description
Hexaware Technologies (Hexaware) is an IT-services company, specialised in offering
enterprise solutions, application management, and embedded system. The company
provides software services to banking and financial services, insurance, travel &
transportation, emerging segments (manufacturing and healthcare) verticals. Hexaware
has a dominant PeopleSoft practice and is amongst the Top 20 software and services
exporter from India. The company’s last twelve month revenues stood at INR 10.5 bn
(USD 231 mn) and it employees 6,511 people.
Investment Theme
Over the past one year Hexaware has focused on improving operational efficiencies and
re-aligned itself vertically from earlier horizontal sales-based approach. Further,
strengthening of the sales force with 16 new recruits and new deal wins reported in the
past six months are likely to result in improving revenue traction going forward. In
addition, high US and BFSI exposure should aid growth in an improving macro
environment. We see Hexaware fundamentally strengthened with the recent initiatives
and with a healthy cash position it is well poised to explore inorganic growth
opportunities as well.
Key risks
• Double dip recession in its major market US and prolonged slowdown in Europe.
• Appreciation of INR against USD, EUR, and GBP.
• Inadequate availability of manpower.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volumes surge and so do margins
Hexaware Technologies’ (Hexaware) Q4CY10 results clearly vindicate our margin
improvement thesis with continuing revenue momentum. Significant growth over
the past two quarters (double digit) has once again been supported by 9% USD
growth during the quarter. Volume growth of 8% Q-o-Q was driven by scale-up
from large client accounts. Importantly, the company’s operating margins
(EBITDA) improved by an impressive 300bps sequentially to 11.5% led by better
cost optimisation. Net profit was further boosted by higher hedging gain and yield
on free cash. Overall, Q4CY10 results indicate that 2011 is expected to be a
strong growth year with growth vectors and margin levers in place.
Revenue outlook on an uptrend
Hexaware is confident of achieving atleast USD 290 mn revenue for CY11E on
back of deal wins in the past one year and the strong deal pipeline being
pursued,. This implies 25% growth over CY10 and 5.8% CQGR through CY11.
Improved traction in Europe and better visibility in APAC region is driving this
confidence.
Investments in sales and account managers yielding results
Hexaware has been investing in account management and field force. It has
appointed dedicated account managers for its top 25 clients, the result of which
is evident in Q4CY10 numbers. Further, with vertical and horizontal specialist
sales people, cross selling within clients should benefit the company. The
company is confident that it will be able to scale 8-9 of 45 clients added last year
to over USD 1mn in CY11 itself.
Operating margin to continue northward journey
With levers such utilisation (69.4%), broadening employee pyramid, offshore
shift, and SG&A leverage, we anticipate EBITDA margin to improve to 14% plus
by Q4CY11E. This will imply a 450bps improvement for CY11 at 13.3% over
CY10, despite salary hikes for CY11 and higher cost of lateral additions.
Outlook and valuations: Growth and margin vectors in place; maintain
‘BUY’
Over the past three quarters, we believe Hexaware has delivered consistent
performance exhibiting fundamental strength. Further, with improved demand
outlook and margin levers in place we revise our CY11 and CY12 EPS estimate
upwards by 12.5% and 7.9% to INR 11.5 and INR 13.9, respectively. At CMP of
INR 111, the stock trades at a P/E of 13.9x and EV/EBITDA of 5.4x on CY11E.
We maintain our ‘BUY/ Sector Performer’ recommendation/rating on the
stock.
Key highlights
• Strong sequential revenue growth: Revenue, at USD 66.6 mn (INR 3 bn), was
ahead of our estimate (USD 65.3 mn), up 9.0% Q-o-Q, primarily driven by strong
volume growth of 8% Q-o-Q.
• Gross profit, at INR 1.0 bn, jumped 9.7% Q-o-Q. Gross margin for the quarter
jumped 100bps Q-o-Q and stood at 34.5% after declining for the past four quarters.
• EBITDA for the quarter, at INR 240 mn, jumped 43.8% Q-o-Q primarily on account
of higher gross margins and lower SG&A spend, while EBITDA margin stood at
11.5%, up 300bps Q-o-Q. Key to note is that EBITDA margin has expanded 470bps
over the past two quarters.
• Net profit, at INR 396 mn, (INR 168 mn in Q3CY10 excluding exceptional gains),
were higher due to percolation of operating margin and forex gain of INR 95 mn
(loss of INR 76 mn in Q3CY10). Net profit margin stands at 13.2%.
• Strong Q1CY11 guidance: Revenue guidance for Q1CY11 is at USD 70 mn (5.1%
Q-o-Q growth). Management expects demand momentum to continue in CY11 and
expects revenue to be at least USD 290 mn, implying growth of 25.4% over CY10.
• Healthy client addition: Hexaware added 11 new clients during the quarter, of
which four each are from America and Europe. Total active clientele is now at 174
against 167 in the previous quarter.
• Client metric: Revenue growth of 9.0% was driven by strong growth from top 5 and
10 clients with a 11.9% and 9.0% sequential increase, respectively. Hexaware's
largest client was down 3.0% Q-o-Q on the back of 41.1% sequential growth in the
previous quarter.
• Broad-based vertical performance: During the quarter, growth was driven by
BFSI, which grew 12.1% Q-o-Q. Travel & transportation and emerging segments
(mfg & healthcare) grew 4.1% and 9.3% Q-o-Q, respectively.
• Momentum continues in EAS and business intelligence: During the quarter, EAS
and ADM grew 8.6% and 2.6%, Q-o-Q, respectively. Business intelligence & analytics
and testing also posted strong growth of 19.4% and 38.9% Q-o-Q, respectively,
albeit on a smaller base.
• Employee additions: The quarter saw net employee addition of 203 on the back of
277 employees in the previous quarter. The total employee count now stands at
6,511. Management has indicated it will add 1,500 employees in CY11.
• Utilisation for the quarter soared 90bps to 69.4% from 68.5% in Q3CY10.
• Annualised attrition stands at 19.6% versus 19.9% in the previous quarter.
• Geo split: North America (13.7%) and ROW (17.2%) posted positive growth during
the quarter while Europe declined 4.0% sequentially.
• Hedging: Hexaware has hedges worth USD 130.5 mn (at an avg. rate of INR 48.25)
for the subsequent eight quarters and EUR 15.8 mn (at hedge rate of INR 72.13),
maturing in December 2012.
• DSO decreased from 63 days (in Q3CY10) to 59 days in the current quarter.
• Current cash and equivalents position stands at INR 4.6 bn, translating into INR 32
per share (~29% of current market price).
Company Description
Hexaware Technologies (Hexaware) is an IT-services company, specialised in offering
enterprise solutions, application management, and embedded system. The company
provides software services to banking and financial services, insurance, travel &
transportation, emerging segments (manufacturing and healthcare) verticals. Hexaware
has a dominant PeopleSoft practice and is amongst the Top 20 software and services
exporter from India. The company’s last twelve month revenues stood at INR 10.5 bn
(USD 231 mn) and it employees 6,511 people.
Investment Theme
Over the past one year Hexaware has focused on improving operational efficiencies and
re-aligned itself vertically from earlier horizontal sales-based approach. Further,
strengthening of the sales force with 16 new recruits and new deal wins reported in the
past six months are likely to result in improving revenue traction going forward. In
addition, high US and BFSI exposure should aid growth in an improving macro
environment. We see Hexaware fundamentally strengthened with the recent initiatives
and with a healthy cash position it is well poised to explore inorganic growth
opportunities as well.
Key risks
• Double dip recession in its major market US and prolonged slowdown in Europe.
• Appreciation of INR against USD, EUR, and GBP.
• Inadequate availability of manpower.
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