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Spark Capital: Hexaware 4QCY13 result review: Results tad below expectation; Surprising dividend payout




Spark Capital Advisors(India) Private Limited


11 Feb 2014





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Hexaware 4QCY13 result review: Results tad below expectation; Surprising dividend payout Hexaware reported revenues of US$ 100 mn (up 1.1% qoq), in line with our expectations (of US$ 101 mn). The negative surprise was on EBITDA margins which declined 130 bps qoq with incremental hiring in pre sales team, front end and also new business heads. The company has been undergoing restructural changes (post baring stake acquisition) to improve mining in the existing accounts especially top 10 clients. Additionally, with integration of all HCM services, the management believes it has a better go to market capabilities than before. The positive surprise was on the dividend payout of Rs.8.5/share with interim dividend of Rs. 7.5/share and final dividend of Rs.1/share. Though the management is non-committal about dividend policy going ahead, we believe future dividend payout ratio would be at 30%. The management has reiterated that CY14E would be a better year than CY13E with improved traction in Continental Europe and increasing spends with upgrade of Peoplesoft. With no large deal wins in the last year, incremental client mining is crucial for Hexaware revenue growth in the coming years. Additionally, with increasing investments in S,G&A front and impact of wage hikes (onsite – q1 and offshore – q2), we believe margins would be lower than CY14E than CY13E. Thus, while improving deal pipeline & increase in the overall macro spends would led to better revenue growth in CY14E, the most pivotal factor would be movement of margins with increasing investments. Retain Add with TP of Rs.150. Operational performance: CC revenue growth came in at 1.1% qoq. Growth was primarily led by US and ROW while Europe was weak. Employee headcount declined by 65 employees to 8,885 while utilisation increased by 280 bps to 74.6%. Revenues from top client declined 6.5% qoq having strong growth of 17.8% qoq in 3QCY13. EBITDA margins declined 130 bps qoq with increasing investments in S,G&A. The company has hired two 2 country- vertical heads; Domain experts in healthcare, sales personnel across geographies and also made incremental investments to its pre-sales support team. Hexaware has launched Manufacturing vertical this quarter. Continued investments in front end is necessary to drive client mining and revenue growth Retain Add: Though CY14E would better than CY13 we expect revenue growth to lag peers and margin pressures do exists as Hexaware increases front end investments. Moreover lack of clarity on cash utilization would be negative. Retain Add with increased TP of Rs.150 arrived by attaching 10x to our Dec-15 EPS.

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