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MOSL: HEXAWARE (Neutral) - Revenue below estimates - soft 1QCY14 outlook - dividend surprise




Motilal Oswal Securities Ltd.


10 Feb 2014





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Hexaware (HEXW IN, Mkt Cap USD0.6b, CMP INR140, Neutral) Ashish Chopra (Ashish.Chopra@MotilalOswal.com) / Siddharth Vora (Siddharth.Vora@MotilalOswal.com) 4QCY13 below estimates: HEXWs 4QCY13 revenue at USD100.1m grew 1.3% QoQ, below our estimate of USD103.1m. EBITDA margin at 22.5% was down 130bp QoQ, v/s our estimate of 22.9%. PAT however, at INR1032m was above our estimate, primarily driven by lower forex losses and tax rate Segmental: Growth during the quarter was dragged down by top client declining 6.5% QoQ while Top 2-5 clients grew by 3% QoQ, Americas grew among geographies and RIMS and Enterprise Solutions among services. Dividend the only positive: After not announcing any dividend last quarter the company surprised positively by announcing INR8.5 as dividends this quarter. But it still refrains from stating a fixed dividend policy and decisions would be taken based on availability of cash and possible acquisitions in the future. Large deals remain elusive, company hopeful: The deal pipeline remains healthy, however, large deals progression at HEXW have taken a hit over the past few quarters. The deal pipeline has shrunk to 2-3 from 4-6 large deals in the past. It is facing stiff competition from larger peers and incumbents in large deals. Healthy outlook for CY14 but soft 1Q: The outlook for CY14 continues to be healthy as deal pipeline is much stronger and expected growth is more broad based than in the past. There have been delays in ramp up of new projects which caused lower growth this quarter and are expected to result in soft 1QCY14 as well. Valuation and view: We have revised our USD revenues estimates for CY14/CY15E downwards by 170bp/60bp post below expectation performance in 4QCY13 and guidance of a soft 1QCY14. While the stock is relatively undervalued compared to its tier-II peers, we believe that caution is merited owing to substantial changes in fundamentals in the recent quarters. Our Target Price of INR151 discounts CY15E EPS by 10x. Maintain Neutral.

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