USD revenue growth of 5.3% qoq in 3Q11 (on base of cqoq growth of 8% in last four quarters)
and 345bp EBITDA margin improvement qoq (1,022bp yoy) support our view that Hexaware is an
emerging alternative for Fortune 1000 clients. A healthy cash position and dividend yield of 4%+
offer downside protection.
3Q11: another solid quarter; confident stance continues beyond 3Q11
Despite a high base of 8% compounded qoq revenue growth in 2Q10-2Q11, Hexaware again
beat our forecasts by registering USD revenue growth of 5.9% qoq in constant currency (cc)
(RBS forecast: 5.1%). It guides for 4-4.7% qoq growth (4.6-5.3% cc) in 4Q11. Hexaware’s
strategy of moving away from growing via small projects and focussing on penetrating
existing/potential large accounts by cross-selling various service offerings and resulting wins of
five large-deals in the past five quarters gives management confidence that it can expect CY12
growth exceeding the industry average. Hexaware is negotiating four large deals, each at
US$25m-plus. A strong exit run rate of revenues in 4QCY11F and expected ramp-up of large
deals won gives us comfort in our 19% CY12 revenue growth forecast.
Besides improving revenue traction, strong execution driving qoq margin surprise
3Q11 EBITDA margin was up 345bp qoq (1,022bp yoy). With favourable INR and SG&A
leverage, further improvement cannot be ruled out. We believe that even in CY12, current
margins are likely to be sustained in cc terms despite likely headwinds from wage inflation in
CY12, given levers that include 1) SG&A (at 19.5%, still much higher than large-cap peers); 2) an
employee pyramid with increasing recruitment of freshers (750-800 freshers to be inducted in
CY11, similar or higher in CY12); and 3) improving offshoring.
Maintain Buy; healthy cash position/div yield of 4%-plus offers downside protection
We raise CY11-13F EPS by 9%, 12% and 13%, respectively, given the outperformance in 3Q11
PAT at Rs647m (RBS forecast: Rs568m) with higher-than-expected margins and revenue outlook
and a change in INR assumptions. We maintain Buy. We believe our revised TP of Rs105,
valuing EPS of four quarters ending 31 March 2013F at around 12x (vs 11.4x previously), is
justified given improving margins, return ratios, cash flows (current net cash at 18% of market
cap) and dividend yield of 4%-plus. Key risks include a slowdown in western economies, high
client concentration and Hexaware’s discretionary revenues.
and 345bp EBITDA margin improvement qoq (1,022bp yoy) support our view that Hexaware is an
emerging alternative for Fortune 1000 clients. A healthy cash position and dividend yield of 4%+
offer downside protection.
3Q11: another solid quarter; confident stance continues beyond 3Q11
Despite a high base of 8% compounded qoq revenue growth in 2Q10-2Q11, Hexaware again
beat our forecasts by registering USD revenue growth of 5.9% qoq in constant currency (cc)
(RBS forecast: 5.1%). It guides for 4-4.7% qoq growth (4.6-5.3% cc) in 4Q11. Hexaware’s
strategy of moving away from growing via small projects and focussing on penetrating
existing/potential large accounts by cross-selling various service offerings and resulting wins of
five large-deals in the past five quarters gives management confidence that it can expect CY12
growth exceeding the industry average. Hexaware is negotiating four large deals, each at
US$25m-plus. A strong exit run rate of revenues in 4QCY11F and expected ramp-up of large
deals won gives us comfort in our 19% CY12 revenue growth forecast.
Besides improving revenue traction, strong execution driving qoq margin surprise
3Q11 EBITDA margin was up 345bp qoq (1,022bp yoy). With favourable INR and SG&A
leverage, further improvement cannot be ruled out. We believe that even in CY12, current
margins are likely to be sustained in cc terms despite likely headwinds from wage inflation in
CY12, given levers that include 1) SG&A (at 19.5%, still much higher than large-cap peers); 2) an
employee pyramid with increasing recruitment of freshers (750-800 freshers to be inducted in
CY11, similar or higher in CY12); and 3) improving offshoring.
Maintain Buy; healthy cash position/div yield of 4%-plus offers downside protection
We raise CY11-13F EPS by 9%, 12% and 13%, respectively, given the outperformance in 3Q11
PAT at Rs647m (RBS forecast: Rs568m) with higher-than-expected margins and revenue outlook
and a change in INR assumptions. We maintain Buy. We believe our revised TP of Rs105,
valuing EPS of four quarters ending 31 March 2013F at around 12x (vs 11.4x previously), is
justified given improving margins, return ratios, cash flows (current net cash at 18% of market
cap) and dividend yield of 4%-plus. Key risks include a slowdown in western economies, high
client concentration and Hexaware’s discretionary revenues.
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