Hexaware Technologies- Firing on all cylinders, raise TP:Macquarie Research,

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Hexaware Technologies
Firing on all cylinders, raise TP
Event
 We raise our TP to Rs103 (vs Rs92 earlier) post solid 3Q CY11 results.
Offshore effort shifts, cost efficiencies on SG&A and currency depreciation
have helped the company to post margin surprise. We now have more
comfort on the sustainability of margins and raise our margin forecast by
150bp for CY12 and CY13, leading to an increased TP. Reiterate OP.
Impact
 Conference call takeaways. (1) The CEO indicated initial discussions with 8
of the top 10 clients of the company indicated that IT budgets are going to flat
to slightly up next year; (2) US$100m deal win announced earlier in the year
has reached steady state. We think this can aid future cost rationalisation; (3)
Hexaware is targeting 800-1000 fresher induction in CY12 (vs. 800 in CY11).
 Billing, Forex & Costs rationalization pumps margins. The key moving
parts for EBIT margin improvement of 350bps this quarter are: +170bps due
to FX, +75bp due to effort/offshore movement, +115bps from billing, -140bps
from wage hikes and fresh hiring, +130bps from SG&A rationalization.
 CY11 revenue growth guidance raised again, now at 32% YoY growth.
Our positive view on the name is premised on strong execution and healthy
deal wins. The performance this quarter and positive 4Q outlook reinforce our
investment view. Growth momentum is the most potent margin lever for the
company. This quarter’s performance, coupled with mgmt commentary on the
preliminary 2012 outlook, is comforting for the margin outlook.
 Forex hedges at good levels for CY12-13. The company has hedges worth
US$177m at a ~INR/USD exchange rate of ~Rs48. This is close to the
prevailing rate of ~Rs49. In case the currency appreciates, the company
should have a forex gain in the coming quarters.
Earnings and target price revision
 We retain our street-high revenue forecast for the company and are raising
our margin assumption. Cost rationalizations result in 11% rise in our
CY11E/12E EPS. ( For details see Fig 1-3) As a result, our PER-based target
price moves to Rs103 (vs Rs92 earlier). For details on changes to estimates,
see Fig 4.
Price catalyst
 12-month price target: Rs103.00 based on a PER methodology.
 Catalyst: Large deal wins
Action and recommendation
 Reiterate OP.