Hexaware's (HEXW IN) 3QCY12 results were below estimates. Revenues at USD92.8m grew 1.7% QoQ, lower
than estimate of 2.5% growth. EBITDA margin fell 130bp QoQ to 21.6% v/s estimate of 40bp decline, explained
by lower currency rate (INR54.68 v/s est of INR55.5), lower utilization (67.6% v/s est of 70%) and higher SGA
(17.9% v/s est of 17.4%). PAT at INR841m too was below estimate of INR919m, on lower revenues, margins and
forex loss of INR39m.
For 4QCY12, company guided for revenues of USD94.7-96.5m, QoQ growth of 2-4%. This implies full year USD
revenue growth of 19-19.6%, down from 'at least 20%'.
The very tenets of Hexaware's story appear to be under stress, at least over the near term: [1] it is chasing 4
large deals in the pipeline. But this time around, none is seeing an imminent closure. And a deal win, if any,
may not get finalized before 1QCY13, [2] acquisitions are back on the radar. Earlier, they were not the focus,
with management citing strong organic growth opportunity. In the event of an acquisition, the payout policy
too may be revisited.
However, Hexaware expressed confidence in continuing to grow above the industry average next year, based
on early conversations with key accounts.
We lower CY13E USD revenue estimate by 5.2% on slowing velocity of large deals and EPS estimate by 12.5%.
Our revised target price of INR135 is based on 11x CY13E EPS v/s a multiple of 12x earlier due to: [1] slowing
velocity of large deal wins and [2] likelihood of payout ratios coming down on the back of an acquisition, with
inorganic growth route back in contention.
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