Hexaware: Valuation remains compelling Growth and margin comfort improves; reiterate Buy:: Nomura

Valuation remains compelling
Growth and margin comfort
improves; reiterate Buy

Action: Guidance and margins better than expected; reaffirm Buy
HEXW’s strong guidance of: 1) 3.5-5.5% q-q revenue growth in 3QFY13F
(vs. our expectation of 3-4% q-q) and 2) similar growth in 4Q, increases
confidence in our revenue growth estimates. Our margin expectations
have increased by ~200bps across FY13/14F on the margins beat in 2Q,
a stable outlook and INR depreciation. This translates into an improved
EPS growth profile with a CAGR of 10% over FY12-14F (up from 4%
earlier). At ~8x FY14F EPS plus a dividend yield of 5%-plus we find the
stock attractive. Reaffirm Buy. HEXW/IGTE are our top picks in Tier-2 IT.
Catalysts: Large deal wins and growth in line with guidance
2QFY13: Revenues in line but margins significantly ahead
While 2Q revenue growth was largely in line with our expectation at 0.8%
q-q, margin improvement of 440bps q-q was a significant beat (of 120bps
ex of one-offs). Management’s guidance for margins to remain flattish in
3Q (despite headwinds of wage hikes and non-recurrence of provision
reversal benefits accrued in 2Q) and increase in quarterly dividend to
INR1.4 (from INR1.2) in line with the 50% dividend payout guidance were
positives. We expect USD revenue growth of 7%/13% in FY13/14F
(marginally higher than our earlier expectations).
Raise TP to INR130 based on 10x FY14F EPS of INR13.2
We raise our TP to INR130 (from INR110) on: 1) a 14%/12% increase in
EPS estimates for FY13/14F, driven by marginally higher revenue growth
and higher margin expectations; and 2) upgrade in our valuation multiple
to 10x one-year forward EPS (from 9x) on a better EPS growth trajectory

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