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Hexaware Technologies Ltd.
Strong quarter; on track for
margin expansion
3Q validates margin expansion story
Post strong 3Q, we tweak our estimates for CY11e and CY12e and retain Buy
rating on the stock with a PO of Rs110. 3Q results validate our view of strong
revenue growth momentum driven by ramp in existing clients and potential margin
expansion. We believe Hexaware is on track to achieve ~12% EBIT margins for
CY11, increase of ~600bps yoy given potential leverage in SG&A and scope to
improve utilization levels. At 8x CY11E and cash per share of Rs29, stock is
attractively valued, in our view. Retain as top mid cap pick.
Strong 3Q; Revs up 12% QoQ, margins expand
Revenues grew 11.3% QoQ in USD, 4% ahead of our estimates and surpassed
revised company guidance of 9% QoQ growth. EBIT margins expanded by
204bps QoQ to 6.5% driven by scale benefits and improvement in billing rates.
Management highlighted that margins were compressed by ~220bps on account
of knowledge transfer phase for recent USD110mn win. Recurring PAT grew by
86% QoQ, driven by higher margins.
Plans to achieve double digit margins for CY11
For 4Q, Hexaware guided at 5 to 6% QoQ USD revenue guidance in line with our
estimate. Management also expects to achieve double digit margins for CY11,
implying continued margin expansion over next few quarters. We have ~12%
EBIT margins for CY11E.Hexaware continues to see strong traction in ERP
vertical (29% revs) in particular on PeopleSoft version 9.1 upgrade spend.
Forecast EPS CAGR of 42% over CY10-12, driven by 23% growth in revenues
and significant improvement in margins. Retain Buy
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