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We intiate coverage on Hexaware with a ‘Reduce’ rating and a target price of Rs100,
implying 15% potential downside from the current level. Three reasons for our
bearish view – growth seems less secure as discretionary spend trajectory
disappoints, there is limited leverage as the best growth profile era is over and last
but not the least – valuation is full.
Discretionary spend losing steam, momentum at risk: Hexaware was the
beneficiary of accelerated momentum in IT spend, particularly for ERP. The
strong demand in 2010-11 gave it increased focus and renewed vigour in the
vertical. But uncertainty around discretionary spend has put growth trajectory at
risk. We believe that momentum is likely to decelerate as cost cognizance
remains the central theme for CIOs.
Best is behind us, growth less secure: Industry fundamentals appear to have
peaked-out for this cycle. The enterprise’s focus on cost-cutting means that
application spending growth is likely to be subdued. Competitive positioning,
execution and cash generation are the key. We believe that organic growth can
drive 12% EPS growth for the next two years — an opportunity already reflected
in a demanding rating of 11x times CY12 earnings. Our price target of Rs100
implies 15% potential downside and would put Hexaware at 9x CY12, still at par
with its Indian technology peers, despite potential downside risk of growth
prospects.
Risk‐Reward skewed to downside: The current run-up in the stock price factors
in upside due to potential stake sale by promoters and current private equity
holders. We believe that any failure of such talks would push the valuation back
to fundamentals. If the stake sell-out happens, a potential open-offer could give
upside to the current upside.
Valuation & Recommendation: We are initiating coverage on Hexaware with a
‘Reduce’ rating. We believe the stake-sell news, which is the primary reason
why we have a volatility flag on the stock, has pushed the valuation that is not
supported by fundamentals. Downside risk of discretionary spend cut could put
earnings at risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We intiate coverage on Hexaware with a ‘Reduce’ rating and a target price of Rs100,
implying 15% potential downside from the current level. Three reasons for our
bearish view – growth seems less secure as discretionary spend trajectory
disappoints, there is limited leverage as the best growth profile era is over and last
but not the least – valuation is full.
Discretionary spend losing steam, momentum at risk: Hexaware was the
beneficiary of accelerated momentum in IT spend, particularly for ERP. The
strong demand in 2010-11 gave it increased focus and renewed vigour in the
vertical. But uncertainty around discretionary spend has put growth trajectory at
risk. We believe that momentum is likely to decelerate as cost cognizance
remains the central theme for CIOs.
Best is behind us, growth less secure: Industry fundamentals appear to have
peaked-out for this cycle. The enterprise’s focus on cost-cutting means that
application spending growth is likely to be subdued. Competitive positioning,
execution and cash generation are the key. We believe that organic growth can
drive 12% EPS growth for the next two years — an opportunity already reflected
in a demanding rating of 11x times CY12 earnings. Our price target of Rs100
implies 15% potential downside and would put Hexaware at 9x CY12, still at par
with its Indian technology peers, despite potential downside risk of growth
prospects.
Risk‐Reward skewed to downside: The current run-up in the stock price factors
in upside due to potential stake sale by promoters and current private equity
holders. We believe that any failure of such talks would push the valuation back
to fundamentals. If the stake sell-out happens, a potential open-offer could give
upside to the current upside.
Valuation & Recommendation: We are initiating coverage on Hexaware with a
‘Reduce’ rating. We believe the stake-sell news, which is the primary reason
why we have a volatility flag on the stock, has pushed the valuation that is not
supported by fundamentals. Downside risk of discretionary spend cut could put
earnings at risk.
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