Hexaware Technologies- Strong margin performance; raise earnings & PO:: BofA Merrill Lynch,

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Hexaware Technologies Ltd.
   
Strong margin performance;
raise earnings & PO
„Stellar quarter; raise earnings & PO
Post strong 3Q, we raise CY11 earnings by 12% and CY12E/13E by 20% to
factor 3Q margin beat and likely continued momentum in revenue growth. Raise
PO to Rs103. Forecast 18% yoy revenue growth for CY12 and 25% yoy EBITDA
growth. Earnings growth though likely muted given increase in tax rates and likely
lower forex gains. Valuations at 10x our CY12E and FCF yield of 6-8% attractive,
in our view.
Strong revenue growth; pipeline healthy
Hexaware reported strong 3Q with USD revenue growth of 5.3% QoQ, led by
9.2% QoQ growth in volume. Growth largely driven by ramp in large deals won
over last 6-9months as reflected by strong 13% QoQ growth in offshore revenues.
Expect revenue growth momentum to continue given recent USD100mn deal win
likely to contribute to revenues from 2Q CY12. Pipeline healthy with at least four
deals under negotiation currently. Guides at 4-4.7% QoQ growth for 4Q CY11E.
Significant margin beat; likely sustainable
EBIT margins expanded 347bps QoQ to 17% vs. our assumption of 50bps
expansion. This was despite salary hike for onsite employees and was the fifth
consecutive quarter of margin expansion. Margin expansion was driven by
improved realization, rupee depreciation, higher offshoring and SG&A leverage.
Expect gains to sustain given significant levers in utilization (~70%) and scope to
further leverage G&A.
Healthy FCF/ dividend yield
Balance sheet remains healthy with net cash & equivalents of Rs4.5bn
(Rs15/share). Announced interim dividend of Rs1/share, inline with its recent
policy of considering ~50% payout. FCF yield at 6-8% attractive.