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Spark Capital - Hexaware: Gathering revenue momentum; Retain Buy




Spark Capital Advisors(India) Private Limited


29 Apr 2013





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Gathering revenue momentum; Retain Buy Hexaware reported revenues US$ 94.1mn at the bottom end of their guidance and tad below our expectation. On the other hand EBITDA margins surprised positively with 240 bps expansion vs. our expectation of 140 bps on the back of strong improvement in utilisation and offshore mix. Management is confident of increasing revenue growth trajectory from 3QCY13 onwards on the back of better order pipeline. 2QCY13 would be the trough in US$ revenue growth for Hexaware. Targeted efforts are underway to mine top-50 accounts and expect Hexaware to have repeat atleast part of the success they reaped with their focus on Top-10 accounts. Revenues inline with guidance: US$ Revenues were within the guidance of US$ 94-95mn. Company guided for revenues of US$ 94-96mn for 2QCY13. Current quarter revenue growth was led by growth returning in top client and in Europe. Revenue growth was predominantly led by volume growth of 1.9% with realisation staying flat. Margins surprise positively: EBITDA Margins expanded 230bps qoq on the back of sharp improvement in utilisation (63.9% to 70.6%) and offshore mix (230bps). Further SG&A reduced sequentially due non recurring seasonal spend in 4QCY12. Reduction in headcount of 399 employees aided to improving utilisation and the company added no fresher during the quarter. Management is confident of improving margins in 2QCY13 also. Back to improving trajectory: 1QCY13 is the first step in Hexaware returning to strong performance. We are pleased with the margin expansion and strong cash collection in the quarter. Improving account mining in top-50 accounts would help in diversifying growth pillars and benefits of the same should start to reflect in revenue growth in CY14. Focus on operation performance during the times of relatively low growth is key and believe the management’s decision to move wage hike to Jul-Sep qtr is a prudent one, given management expects improvement in revenue growth from 3QCY13. Retain Buy: We fine tune our estimates for CY13E and CY14E and forecast US$ revenue growth of 7.2% and 11.9% for CY13E and CY14E respectively. Our CY13E estimates are realistic and offers scope for upgrade if Hexaware wins one of the large deals in the pipeline. EBITDA margins would not improve dramatically from 1QCY13 as we expect the company to reinvest the gains from operational efficiency in driving revenue growth. At 83, stock trades at 7.8x CY13E EPS attractive in our view. Further the high dividend yield (~6%) makes it an attractive investment opportunity. Retain Buy with a price target of Rs. 115.

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