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Hexaware Technologies (HEXW)
Technology
Remarkable run continues; raise estimates, maintain ADD. Sustaining its rich vein
of form, Hexaware reported another solid quarter of revenue growth and margin
expansion. Substantial EBITDA margin beat drove a 20% net income beat over our
estimates. We raise our CY2011/12/13E EPS estimates by 13/21/22%, partly aided by
revised Re/US$ assumptions. Expansion in target multiples would have to wait for more
confidence on margin sustenance what has reached higher-than-historical-average
levels. We raise TP to Rs100/share, maintaining target CY2012E P/E multiple. ADD.
Another robust quarter; margins surprise again
Reported revenues of US$78.8 mn (+5.3% qoq, +29% yoy) were marginally ahead of estimates.
EBITDA of Rs686 mn was however 16% ahead of our estimate – reported margins of 18.7%
(+340 bps qoq despite absorbing onsite wage hikes) were 240 bps ahead of our estimated 16.3%.
Sharp offshore shift in revenues, currency benefits, and further SG&A rationalization were the key
drivers of margin expansion. Net income beat of 19.3% was further aided by higher-thanexpected
other income. Net income for the quarter was Rs646 mn, up 7.3% qoq and 54% yoy.
EBITDA margin – the journey from 6.8% to 18.7% in five quarters (June 2010 to September 2011)
In addition to sustained strong revenue momentum, Hexaware has also delivered a strong EBITDA
margin turnaround over the past five quarters. After hitting a low of 6.8% as late as June 2010,
EBITDA margin has expanded to 18.7% in the September 2011 quarter – an expansion of almost
12% pts in just five quarters. A good 770 bps of this expansion has come on the back of SG&A
leverage – SG&A expenses as % of revenues are down to 19.5% from 27.2%. Absolute SG&A has
gone up by just 4% in this timeframe versus a revenue growth of nearly 46%. Even as increased
sales force efficiency has contributed (S&M headcount is up just 6% since June 2010 from 139 to
147), we also understand from the company that it has cut G&A in absolute terms over the
timeframe. Bulk of G&A savings have accrued from a move to owned premises from rented ones,
driving lower rental and facility expenses. Gross margin expansion of 420 bps over this timeframe
has primarily come on the back of offshore shift and some benefits from Re depreciation.
Lead indicators on revenue growth positive; management confident of sustaining margins
We note some of the key positive indicators on revenue growth – (1) a robust December 2011
quarter revenue growth guidance (+4-4.7% qoq), (2) strong hiring trends – the company added
745 employees during the quarter following on strong net hiring in the June 2011 quarter;
cumulative employee additions over the past two quarters has been 1,500, roughly 23% of end-
March 2011 quarter, and (3) sustained strong traction in top client relationships.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hexaware Technologies (HEXW)
Technology
Remarkable run continues; raise estimates, maintain ADD. Sustaining its rich vein
of form, Hexaware reported another solid quarter of revenue growth and margin
expansion. Substantial EBITDA margin beat drove a 20% net income beat over our
estimates. We raise our CY2011/12/13E EPS estimates by 13/21/22%, partly aided by
revised Re/US$ assumptions. Expansion in target multiples would have to wait for more
confidence on margin sustenance what has reached higher-than-historical-average
levels. We raise TP to Rs100/share, maintaining target CY2012E P/E multiple. ADD.
Another robust quarter; margins surprise again
Reported revenues of US$78.8 mn (+5.3% qoq, +29% yoy) were marginally ahead of estimates.
EBITDA of Rs686 mn was however 16% ahead of our estimate – reported margins of 18.7%
(+340 bps qoq despite absorbing onsite wage hikes) were 240 bps ahead of our estimated 16.3%.
Sharp offshore shift in revenues, currency benefits, and further SG&A rationalization were the key
drivers of margin expansion. Net income beat of 19.3% was further aided by higher-thanexpected
other income. Net income for the quarter was Rs646 mn, up 7.3% qoq and 54% yoy.
EBITDA margin – the journey from 6.8% to 18.7% in five quarters (June 2010 to September 2011)
In addition to sustained strong revenue momentum, Hexaware has also delivered a strong EBITDA
margin turnaround over the past five quarters. After hitting a low of 6.8% as late as June 2010,
EBITDA margin has expanded to 18.7% in the September 2011 quarter – an expansion of almost
12% pts in just five quarters. A good 770 bps of this expansion has come on the back of SG&A
leverage – SG&A expenses as % of revenues are down to 19.5% from 27.2%. Absolute SG&A has
gone up by just 4% in this timeframe versus a revenue growth of nearly 46%. Even as increased
sales force efficiency has contributed (S&M headcount is up just 6% since June 2010 from 139 to
147), we also understand from the company that it has cut G&A in absolute terms over the
timeframe. Bulk of G&A savings have accrued from a move to owned premises from rented ones,
driving lower rental and facility expenses. Gross margin expansion of 420 bps over this timeframe
has primarily come on the back of offshore shift and some benefits from Re depreciation.
Lead indicators on revenue growth positive; management confident of sustaining margins
We note some of the key positive indicators on revenue growth – (1) a robust December 2011
quarter revenue growth guidance (+4-4.7% qoq), (2) strong hiring trends – the company added
745 employees during the quarter following on strong net hiring in the June 2011 quarter;
cumulative employee additions over the past two quarters has been 1,500, roughly 23% of end-
March 2011 quarter, and (3) sustained strong traction in top client relationships.
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