Hexaware Technologies - Growth on a platter Initiating coverage with Outperform ::Macquarie Research,

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Hexaware Technologies
Growth on a platter
Initiating coverage with Outperform rating and Rs85 TP
 We initiate coverage of Hexaware Technologies with an Outperform rating
and a target price of Rs85, implying 28% potential upside. We believe that 3
year CAGR US$ 26% revenue growth and 30% net income growth should
lead to the stock getting rerated. For more details, see our report, „India IT
Services - Mid Cap Mantra for growth‟.
Investment Thesis: Growth on platter
 Strong client orders; large deals push top-line targets. 2010 was a major
year for Hexaware where order wins included a US$110m new deal win from
a Fortune 500 corporation and a US$60m deal renewal during the 1H2010.
The revenues uplift from the same should be fully absorbed 2011 onwards.
Large deals, along with the Oracle‟s PeopleSoft Enterprise 9.1 upgrade
projects, should translate into higher order inflow for the company. Currently,
EAS contributes 30% of the company revenues.
 Margins reverting back to historical levels. Hexaware margins contracted
due to several reasons, including reduced top-line growth, wage increases,
faster hiring and higher SG&A expenses challenged the company margins
from all fronts. We expect strong top-line growth and increased utilization
levels to drive margins higher in 2011 and 2012.
 Forex losses from older forex hedges to discontinue. Hexaware bore the
brunt of hedges taken at a much lower exchange rate of ~Rs40 for the past
six quarters. These hedges were extinguished in September 2010. The
current hedge book stands at US$133m for the next two years at ~Rs48.
Thus, going forward, the forex hedges should be EPS accretive.
Superior client mix, high contribution from top 10 clients
 Hexaware‟s client list includes ~50 of the Fortune 500 companies. This is a
key differentiator for it vs other mid sized IT companies. We believe the
company has done a commendable job in mining its existing client
relationship. As a result, its top 10 clients have contributed 48% of total
revenues and the top client alone makes up 9% of revenues for 1QCY11.
Traction in Emerging segment to diversify revenue mix
 Emerging segment (comprised of Professional Services, Healthcare and
Manufacturing sectors) contributed 41% of total revenues for Hexaware for
FY11. Revenue mix from these sectors has increased from 29% in 2008 to
41% in 1Q2011 and sustained traction in these sectors would likely reduce
the company‟s dependence on BFSI vertical (currently contributing 34% of
revenues).
Valuation
 We have arrived at our target price of Rs85 by applying 13.5x FY12 PER.
This is broadly in line with the average historical multiple for the company of
13x and represents a 47% discount to our target multiple of 26x for TCS and
Infosys.