Hexaware Technologies (3QCY14) : Traction in top clients aid growth. Maintain NEUTRAL :: HDFC Securities, PDF link

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Traction in top clients aid growth
Hexaware’s 3QCY14 results were above our
expectations on all fronts. PAT was 8% above our
estimates aided by revenue and EBIDTA beat.
Company declared its third interim dividend of Rs
2.35/sh, taking the total dividend to Rs 6.95/sh for
YTD CY14.
Hexaware’s growth has been stupendous for the
second straight quarter, driven by momentum in the
top 10 accounts (~51.4% of revenues). The company
delivered 7.2% USD revenue growth CQGR over the
past two quarters (vs. 0.5% CQGR delivered from
1QCY14-1QCY13). The new CEO, Mr. Sri Krishna
(erstwhile head of HCL Tech’s IMS division), has
guided for an increased focus on client delight,
boosting employee morale and strengthening
’relevant service lines’ to provide fresh impetus. We
expect the new CEO to strengthen Hexaware’s IMS
practice (~9% of total revenues) and expand footprint
into Life science and Manufacturing verticals.
We increase our EPS estimates by 10.4/15.5% for
CY15E/CY16E aided by revenue and EBIDTA upgrade.
We raise our TP by 49% to Rs 217/sh (15x CY15 EPS
vs. 11x earlier). Retain NEUTRAL.
 3QCY14 Highlights : Hexaware reported revenues of
USD 110mn, up 7.8% QoQ and way above our
estimates (US$ 105mn). Traction in the top 10 accounts
and onsite shift in effort mix by 70bps helped deliver
higher revenue growth for the quarter. EBITDA margin
at 18% was up 137bps QoQ, and was above our
estimate (16.9%). The new CEO indicated that it would
take at least three quarters to show a more sustainable
performance on growth and margins. PAT at Rs 860mn
was 8% above our est driven by revenue/margin beat.
 View : We model Hexaware’s USD revenues to grow
by 8.3/17.1% for CY14/CY15E (vs. 6.7/16.3% modeled
earlier). We believe that a strong exit rate for 4QCY14
would enable a robust revenue growth in CY15. Net
cash on balance sheet stood at Rs 4.19bn as of
3QCY15. With strong free cash flow generation (FCF at
~Rs 2bn for CY14E), we believe that Hexaware would
continue its benign dividend policy. Dividend payout
ratio of over ~80% for CY14E yields a remarkable
dividend yield of ~4% at CMP. A steep rally of 54%
over the past three months has led to the stock trading
at rich valuations (14.8x CY15 EPS). Hexaware currently
trades at an ~8% premium to Mindtree, which we
believe could be unsustainable. Retain NEUTRAL

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009613