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Spark Capital: Hexaware 4QCY12: Inline with mid-quarter update; Retain Buy




Spark Capital Advisors(India) Private Limited


11 Feb 2013





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Hexaware reported 4QCY12 results inline with our expectation and mid-quarter update provided by the company. Management commented that confidence in attaining double digit revenue growth is high and expect sequential improvement in margin on a constant currency basis. Hexaware’s exit revenue run-rate reduces the probability of the company being a sector leader in revenue growth in CY13 (CY11 & CY12 Hexaware was leader in revenue growth). We believe the downgrade cycle for Hexaware is over and with over all IT spend environment Hexaware would benefit and post strong sequential revenue growth. At current valuations Hexaware offers a favourable risk reward and we remain Buyers of the stock with a price target of Rs. 115. Inline results: US$ revenues declined 0.4% and was a tad above guided revenues of US$ 92mn. EBITDA Margins at 16.7% was within the guided range of 500-700 bps decline in EBITDA margins. Revenue decline was due to Top-client and impacted operational metrics sharply with utilisation dropping 370bps. CY13 revenue growth of 11%: Hexaware guided for 1QCY13 revenue growth of 1.7-2.8% lower than our expectation. Guidance was lower due to delays in one-off the large deals slated for rampup starting 1QCY13. For CY13 Hexaware guided US$ revenue growth to be in double digits. We note that annual revenue growth of over 12% is difficult given the requirement for high sequential growth. We model revenue growth of 11% and expect improvement as the year progress on the back improved end market spend environment. Our confidence stems from Hexaware continuous investment in sales and marketing, strong demand environment in Healthcare and Insurance vertical and improving decision making environment. Margins to improve from here on: Hexaware guided for 150-200 bps improvement in EBITDA margin on a constant currency as the company recovers the lost margins. Avenues for margin improvement are increase in utilisation (down 610 bps yoy), SG&A (up 150 bps yoy) and increase in offshore mix. Retain Buy on strong fundamentals and attractive valuation: Hexaware strong franchise in their key offerings, tight cost control and high payout ratio makes it an attractive investment. At 85, stock trades at 8.5x CY13 EPS and a dividend yield of ~6%. Retain Buy with a price target of Rs. 115.

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