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Spark Capital: Hexaware 2QCY13 Result review - Gathering revenue momentum; Retain Buy




Spark Capital Advisors(India) Private Limited


25 Jul 2013





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Hexaware 2QCY13 Result review - Gathering revenue momentum; Retain Buy Hexaware reported revenues of US$ 94.8mn (up 0.8% qoq),in line with our expectations and at midpoint of their guidance (0-2%). The positive surprise was on margins and revenue guidance for 3QCY13. EBITDA margins came at 23.7% ahead of our 21% estimate, up 440 bps qoq led by forex gains, operational efficiencies and write backs in SG&A. Strong 3QCY13 US$ revenue guidance of US$ 98.1 mn – US$ 100 mn (implying qoq growth of 3.5%-5.5%) further accentuates our view that 2QCY13 has been the trough for US$ revenue growth. The company added 14 new clients this quarter, highest since 1QCY12. Management commentary suggests stronger deal pipeline in U.S and Europe whereas APAC continues to be steady. IMS and BFS would continue to drive growth. Revenue growth was led by top 10 client mining especially the top client (7% qoq) and top 6-10 accounts (6.4% qoq). We believe with key personnel additions in front end, conversion of at least one of the large deals in the pipeline, improved mining of non top 10 accounts could aid in better revenue growth in CY14E. Revenues inline with guidance: US$ Revenues were within the guidance of US$ 94-96mn. Revenue growth was predominantly led by volumes (1.5% qoq) with realisation declining marginally (-36 bps). Across geography, America grew 1.2% qoq whereas Europe was flat (0.8% qoq) and ROW came in weak (3.6% decline).Company guided for revenues of US$ 98-100 mn for 3QCY13. Margins surprise positively: EBITDA margins expanded 440 bps led by forex gains, operational efficiencies and write backs in S,G&A. Forex gains improved margins by 130 bps,reversals in S,G&A gave 235 bps and non existence of visa costs (paid in 1QCY13) added 70 bps. Hexaware has announced wage hikes of 10% effective Q3. The management expects to maintain EBITDA margins around 23% at CC in 3QCY13. Retain Buy: Hexaware has been taking persistent efforts to get back into the historical revenue momentum. We believe aided by strong deal pipeline, improving client additions and mining in non top 10 accounts, CY14E could be a better year than CY13E. Fine tuning our estimates, we forecast US$ revenues to grow 7% and 12% for CY13E and CY14E respectively. EBITDA margins could be range bound 20.5%-21.5% with the company reinvesting the rupee gains and operational efficiencies in driving revenue growth. Further the high dividend yield (~5%) makes it an attractive investment opportunity. Retain Buy with a price target of Rs. 125.

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