Hexaware Technologies - Q2CY15 Result Update - Rich Valuations cap upside :: Centrum

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Rating: Hold; Target Price: Rs280; CMP: Rs283; Downside: 1.2%



Rich Valuations cap upside



Hexaware 2QCY15 results were a mixed bag with a strong revenue beat
negated by an EBIDTA margin miss.  Aided by solid growth in 2Q (5.6%
QoQ in USD), we expect Hexaware to deliver 16.5% USD revenue growth in
CY15E (vs 14.5% modelled earlier). Headcount increased by 9% QoQ in
2QCY15 which indicates solid revenue growth visibility. Albeit,
factoring in ESOP charges, we cut our EBIDTA margin assumptions to
17.9/18% for CY15/CY16E (vs 19.1/19.2% modelled earlier). Hence our
EPS estimates are cut by 9.5/9% for CY15/CY16E. Stock currently trades
at rich valuations (17.5x two year forward EPS) which is at par with
TCS. We retain Hold with TP maintained at Rs280/sh (17x June 17E EPS
vs 16x CY16E EPS earlier).Our P/E upgrade is driven by revenue growth
leadership of Hexaware in the sector.

$ Revenues deliver a solid beat:  Revenues at USD121.3mn were up 5.6%
QoQ and above our estimates (USD120.3mn). Growth in constant currency
came at 5.5% QoQ which is the strongest in the sector. IMS (up 17.9%
QoQ), BPO (up 14.4% QoQ) and ADM (up 6.1% QoQ) delivered higher
growth. Led by strong 2Q beat, we believe that Hexaware is poised to
deliver Industry leading growth of ~16.5% in USD for CY15E. This would
require a 3.3% CQGR for the remaining two quarters. Company has
granted 8.2mn RSU’s to its senior management (~200 employees) with
milestones focus on revenue growth. Hexaware has also beefed up its
top management with senior recruits to head its Global Delivery, IMS
etc.

$ Tepid margin show:  EBIDTA margin (Ex- ESOP charge) came at 18.2% up
20bps QoQ and below our estimates (19.2%). Including ESOP charge,
EBIDTA margin came at 17.1% down 70bps QoQ and way below our estimates
(19.2%). PAT at Rs989mn was 10% below our estimates predominantly lead
by ESOP charge. ESOP’s charge for current quarter is at Rs80mn (vs
Rs12mn in 1QCY15). Hexaware announced second consecutive dividend of
Rs2/sh for the quarter (company paid Rs2/sh dividend in 1Q as well).
Cash on balance sheet stood at Rs4020mn as on 2QCY15. With steady cash
position on balance sheet, we believe that Hexaware is well poised to
continue paying out the Incremental free cash flows generated as
dividends. We note that Hexaware’s dividend payout ratio is the
highest in the sector(89/87% for CY14/CY13)

$ Higher onsite aiding robust growth: We note that revenue growth over
the past five quarters is driven by higher traction at onsite. Revenue
delivered from onsite stood at 61.2% of revenues for 2QCY15 (vs 54.8%
in 2QCY14). Over the trailing four quarters combined, 95% of
Incremental revenues were added at onsite. We note that this was also
a key factor aiding the revenue momentum. Revenues from top 10 clients
were up 6.7% QoQ and accounted for 56% of total revenues.

$ Valuations leave no room for error: Hexaware intends to target the
midsized accounts of Tier 1 Indian IT vendors by focusing in
Automation to provide cost efficiencies to the client. Management
indicated of winning deals against Indian Tier 1 IT vendors ( a
leading Custodian , A large European Telco) in 2QCY15 with this
strategy.  While we see accelerated growth at Hexaware, we see limited
room for EPS upgrades. Higher onsite effort, investments in onsite
delivery centers, increased investments in Sales and Marketing could
restrict any positive surprises on margins. With major P/E re-rating
already in the stock, we see muted incremental absolute returns in the
stock. Maintain Hold.



Thanks & Regards

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