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Hexaware Technologies (HEXW)
Technology
On a roll. Raise estimates and target price, reiterate BUY. Hexaware’s 1QCY11
earnings report threw several indicators suggesting that the business recovery is for real
– sustained revenue momentum (qoq revenue growth of 5.7%, CQGR of 9.7% in the
past 4 quarters), OPM expansion (+280 bps qoq, +610 bps yoy), strong 5.8-6.5% qoq
revenue growth guidance for 2QCY11, and a raise in CY2011E revenue guidance. We
raise our CY2011/12E EPS estimates by 17/13% and TP by 18% to Rs80. Reiterate BUY
Another solid quarter – maintains momentum, beats expectations
Hexaware reported revenues of US$70.4 mn for March 2011 quarter, ahead of its US$70 mn
guidance and in line with our estimate. Combine the 5.7% qoq revenue growth delivered in the
seasonally weak March 2011 quarter with the 11% revenue CQGR delivered in the past 3 quarters,
and a strong 5.8-6.5% qoq revenue growth guidance for the June 2011 quarter – what you have
is a business that has clearly recovered from the lows hit during the downturn. Margin trajectory
improvement (OPM was up 280 bps qoq to 14.3%) back to historical pre-downturn average levels
also suggests operational stability. The company has also reiterated a positive outlook on revenue
growth in the coming quarters – this may not reflect in the implied flat qoq revenue growth
trajectory in the company’s CY2011E revenue guidance, which is conservative, in our view.
Business turnaround – a full-cycle now complete
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. These external and internal challenges led
to a sharp drop in quarterly revenue run-rate (from the previous peak of US$68 mn in June 2008
to lows of US$49 mn in March 2010). Operational and management instability also reflects in the
wild yo-yo in OPM in this timeframe – margins ranged between 7% and 24% in the past 10
quarters.
We are encouraged by the business turnaround that the new management team has delivered and
believe that revenue momentum and operational stability is here to stay for some time. Hexaware
is exposed disproportionately to discretionary spends/cyclical verticals and is benefiting from an
uptick in IT spends in these areas.
Raise estimates; reiterate BUY
We raise our CY2011/12E EPS estimates by 17/13% to Rs6.6/7.4 and TP by 18% to Rs80 (from
Rs68). Hexaware remains our only mid-cap BUY-rated stock. It meets the three requisites we have
from a mid-cap – (1) robust volume outlook, (2) low risk to margins, and (3) reasonable valuations
(~11X CY2011E P/E). BUY.
Key highlights of the results
�� Strong 5.8-6.5% qoq US$ revenue growth guidance for the June 2011 quarter (to
US$74.5-75 mn)
�� Indicates at least 27.5% yoy US$ revenue growth for CY2011E. We note that this implies
flat sequential revenues for 3Q-4QCY11E – clearly conservative, in our view – this is at
odds with the positive outlook on demand and revenue growth shared by the company.
Management’s guidance conservatism is understandable given that it has missed and
downgraded its annual revenue guidance in the past
�� Net headcount addition of 153 for the quarter, low but understandable given the low
utilization levels the company was running at. We expect acceleration in hiring ahead –
the company has maintained its net hiring guidance of 1,500 for CY2011E
�� Attrition remained steady at 19.6% for the quarter
�� Impressive margin expansion of 280 bps qoq was led by (1) currency benefits – Re/US$ as
well as cross-currency, (2) improvement in utilization – jumped 330 bps qoq to 72.7%, (3)
offshore shift in revenues – to 40.8% from 39.6% in the previous quarter, and (4)
benefits from stability in the large deal signed in 2QCY10 – we note that the company
was bearing knowledge transfer costs on this large deal for the past two quarters
�� Client metrics were steady overall; there was strong growth in the top account
�� Billing rates improved 1.1% qoq onsite and 1.5% offshore, partially aided by crosscurrency
benefits
�� DSO increased to 63 days from 59 days in 4QCY10. Cash and equivalents at end-March
2011 were steady at a little over US$100 mn
Earnings estimate revision – details
We have raised our CY2011E and CY2012E EPS estimate for Hexaware to Rs6.6 and Rs7.4
from Rs5.7 and Rs6.5, respectively. Earnings upgrade is driven by ~1% revision in US$
revenue estimates and +150 bps revision in EBITDA margin estimates for CY2011/12E. We
now build in 33%/20% revenue growth and EBITDA margin of 14.3%/14.5% for
CY2011/12E. We raise our target price on the stock to Rs80/share from Rs68 earlier; implied
target multiple is 11X CY2012E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hexaware Technologies (HEXW)
Technology
On a roll. Raise estimates and target price, reiterate BUY. Hexaware’s 1QCY11
earnings report threw several indicators suggesting that the business recovery is for real
– sustained revenue momentum (qoq revenue growth of 5.7%, CQGR of 9.7% in the
past 4 quarters), OPM expansion (+280 bps qoq, +610 bps yoy), strong 5.8-6.5% qoq
revenue growth guidance for 2QCY11, and a raise in CY2011E revenue guidance. We
raise our CY2011/12E EPS estimates by 17/13% and TP by 18% to Rs80. Reiterate BUY
Another solid quarter – maintains momentum, beats expectations
Hexaware reported revenues of US$70.4 mn for March 2011 quarter, ahead of its US$70 mn
guidance and in line with our estimate. Combine the 5.7% qoq revenue growth delivered in the
seasonally weak March 2011 quarter with the 11% revenue CQGR delivered in the past 3 quarters,
and a strong 5.8-6.5% qoq revenue growth guidance for the June 2011 quarter – what you have
is a business that has clearly recovered from the lows hit during the downturn. Margin trajectory
improvement (OPM was up 280 bps qoq to 14.3%) back to historical pre-downturn average levels
also suggests operational stability. The company has also reiterated a positive outlook on revenue
growth in the coming quarters – this may not reflect in the implied flat qoq revenue growth
trajectory in the company’s CY2011E revenue guidance, which is conservative, in our view.
Business turnaround – a full-cycle now complete
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. These external and internal challenges led
to a sharp drop in quarterly revenue run-rate (from the previous peak of US$68 mn in June 2008
to lows of US$49 mn in March 2010). Operational and management instability also reflects in the
wild yo-yo in OPM in this timeframe – margins ranged between 7% and 24% in the past 10
quarters.
We are encouraged by the business turnaround that the new management team has delivered and
believe that revenue momentum and operational stability is here to stay for some time. Hexaware
is exposed disproportionately to discretionary spends/cyclical verticals and is benefiting from an
uptick in IT spends in these areas.
Raise estimates; reiterate BUY
We raise our CY2011/12E EPS estimates by 17/13% to Rs6.6/7.4 and TP by 18% to Rs80 (from
Rs68). Hexaware remains our only mid-cap BUY-rated stock. It meets the three requisites we have
from a mid-cap – (1) robust volume outlook, (2) low risk to margins, and (3) reasonable valuations
(~11X CY2011E P/E). BUY.
Key highlights of the results
�� Strong 5.8-6.5% qoq US$ revenue growth guidance for the June 2011 quarter (to
US$74.5-75 mn)
�� Indicates at least 27.5% yoy US$ revenue growth for CY2011E. We note that this implies
flat sequential revenues for 3Q-4QCY11E – clearly conservative, in our view – this is at
odds with the positive outlook on demand and revenue growth shared by the company.
Management’s guidance conservatism is understandable given that it has missed and
downgraded its annual revenue guidance in the past
�� Net headcount addition of 153 for the quarter, low but understandable given the low
utilization levels the company was running at. We expect acceleration in hiring ahead –
the company has maintained its net hiring guidance of 1,500 for CY2011E
�� Attrition remained steady at 19.6% for the quarter
�� Impressive margin expansion of 280 bps qoq was led by (1) currency benefits – Re/US$ as
well as cross-currency, (2) improvement in utilization – jumped 330 bps qoq to 72.7%, (3)
offshore shift in revenues – to 40.8% from 39.6% in the previous quarter, and (4)
benefits from stability in the large deal signed in 2QCY10 – we note that the company
was bearing knowledge transfer costs on this large deal for the past two quarters
�� Client metrics were steady overall; there was strong growth in the top account
�� Billing rates improved 1.1% qoq onsite and 1.5% offshore, partially aided by crosscurrency
benefits
�� DSO increased to 63 days from 59 days in 4QCY10. Cash and equivalents at end-March
2011 were steady at a little over US$100 mn
Earnings estimate revision – details
We have raised our CY2011E and CY2012E EPS estimate for Hexaware to Rs6.6 and Rs7.4
from Rs5.7 and Rs6.5, respectively. Earnings upgrade is driven by ~1% revision in US$
revenue estimates and +150 bps revision in EBITDA margin estimates for CY2011/12E. We
now build in 33%/20% revenue growth and EBITDA margin of 14.3%/14.5% for
CY2011/12E. We raise our target price on the stock to Rs80/share from Rs68 earlier; implied
target multiple is 11X CY2012E EPS.
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