HEXAWARE 3QCY10: CY11 guidance positive:: Motilal Oswal

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 HEXAWARE 3QCY10: 2nd quarter of sequential double digit revenue growth; Margins sluggish; CY11 guidance positive

Hexaware Technologies’ (HEXW IN; Mkt Cap US$0.3b, CMP Rs87, Not Rated) 3QCY10 revenue grew 11.3% QoQ to US$61m, above the management’s upgraded guidance of US$60m, and its second consecutive quarter of sequential double digit growth. While EBIT margins continued to remain in single digits (despite 200bp QoQ improvement), management’s guidance of double digit EBIT margins in CY11 was positive.

Result highlights

-          Revenues grew 11.3% QoQ to US$61m (v/s upgraded guidance of US$60m). INR revenue at Rs2.8b grew 12.2% QoQ, driven by QoQ volumes growth – 10.2%; c172a50186a0284d25bbfa5e81f8aaee ~US$300k gains from pricing realization (50bp), and 1 ~US$300k impact of cross currency (50bp).

-          EBIT margin, while still in single digits, grew 200bp QoQ from 4.4% to 6.4%, led by strong volume growth. Guidance of double digit EBIT margin in CY11 is positive.

-          PAT excluding exceptional items declined 2.3% QoQ at Rs168m. Diluted EPS excl exceptional items is at Rs1.1; diluted EPS after exceptional items is at Rs2.8 (on Rs252m net positive value of exceptional items during the quarter).

-          4QCY10 revenue guidance of US$64-65m implies QoQ growth of 4.7-6.4%. The management expressed confidence in registering growth above industry average in CY11 on better visibility.

Margins improvement seen ahead on multiple levers; Above industry-average growth guidance for CY11 positive

-          Hexaware’s EBIT margins improved 200bp QoQ on strong volumes growth, better utilization and forex; however the profitability continues to remain sluggish at 6.4%.

-          The management guided for double-digit operating margins in CY11 on lower investments going forward. With reduction/absence of costs like knowledge transition and one-time exceptional costs to the tune of Rs384m incurred on the large deal in the current quarter, incremental growth is expected to lead to expansion in margins.

-          Key margin levers are: Volume growth; c172a50186a0284d25bbfa5e81f8aaee Utilization; 1 Bulge mix; and Lower SGA proportion.

-          The management guided for 4QCY10 revenue at US$64-65m, implying QoQ growth rate of 4.7-6.4%. Hexaware expects to grow at above industry average in CY11 on increased visibility and improved outlook on demand environment: large deal won in 2QCY10, having already ramped up, is expected to contribute over US$20m revenues per annum; c172a50186a0284d25bbfa5e81f8aaee Top-clients are expected to continue to grow on the base of an impressive 3QCY10 performance (top client grew 41% QoQ, growth in 2-5 clients was 14.5% QoQ).

-          Healthy growth guidance in CY11 coupled with improved operating performance expectation augurs well for the stock; overhang of single-digit operating margins on heavy investments is an ongoing concern.

Other highlights

-          Cash and cash equivalents dropped to Rs4.7b from Rs5.3b in 2QCY10 on: Exceptional charges of Rs384m incurred towards the large deal signed in the last quarter; c172a50186a0284d25bbfa5e81f8aaee Capex of Rs129m; 1 Increase in working capital of Rs386m and Payout of interim dividend of ~Rs100m.

-          DSO increased to 63 days from 53 days previous quarter (guided at 56-58 days).

-          EAS (18.1% QoQ growth), Travel Transportation and Healthcare (26.7% QoQ growth) and Americas (13.5% QoQ growth) were the key growth drivers

-          Annualized attrition rate was 19.9% (v/s 22.6% in 2QCY10). Global headcount at 6,308 increased by 277 people over 2QCY10.

-          Utilization rate increased 50bp QoQ to 68.5%

-          Outstanding hedges amount to US$115m, spread over 9 quarters.