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MOSL: HEXAWARE TECH (Neutral) - Significant estimates miss - cutting EPS by 10-12% - dividend payout remains high




Motilal Oswal Securities Ltd.


30 Apr 2014





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HEXAWARE TECHNOLOGIES 1QCY14: Significant estimates miss; cutting EPS by 10-12%; dividend payout remains high (HEXW IN, Mkt Cap USD0.8b, CMP INR153, TP INR140, 8% Downside, Neutral) 1QCY14 significantly below estimates: HEXW’s 1QCY14 revenue declined 4.3% QoQ to USD95.8m, while we expected growth of 1.3% QoQ to USD101.4m. EBITDA margin declined 330bp QoQ to 19.2% v/s our estimate of 22%. Hence, PAT was at INR703m, significantly below our estimate of INR1,015m. Top 10 clients weak: Management attributed the revenue softness to top 10 customers, where it saw some project closures and budget reallocation to other initiatives on the client side. It is guiding for healthy QoQ growth in 2Q and improvement in operating margin. Strong dividend payout again: HEXW announced INR3 per share of dividend, implying payout of INR1.05b (including dividend tax). It distributed INR11.5 per share in dividends over the last two quarters, or INR4b, after taxes. Post distribution of latest round of dividends, net cash should decline to INR3.4b (from INR6.56b at end-4QCY13). Cutting EPS estimate by 10-12%: We have cut CY14E/15E USD revenue estimates by 5.7%/6.9%. We expect 4.1% YoY growth in USD revenue in CY14 and a pick-up in the same to 11% in CY15. Our EBITDA margin estimates are revised by -30bp/+30bp in CY14E/15E as we expect the company to gradually recover margins with revenue growth. Thus, our EPS estimates are down by 11.7%/10.1% for CY14E/15E to INR11.9/INR13.5. Neutral, given revenue underperformance: HEXW’s substantial underperformance to peers will warrant a lower multiple, despite significant dividend yield, as it continues to struggle in driving revenue growth. Also, the high dividend payout in the last two quarters will likely heighten the noise around a potential delisting of the stock. Our target price of INR140 discounts CY15E EPS by 10x. Maintain Neutral.

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