Hexaware Technologies Ltd. share price target

Background Hexaware is a mid-cap IT company & a leading global provider of IT solutions. In 2QCY19: Revenue share from Application Development & Maintenance is (37.0%), Enterprise Services (9.4%), Testing (17.7%), Business Intelligence & Analytics (12.3%), BPS (8.0%) and Remote Infrastructure Management services (15.6%). The total headcount stands at 18,294 and number of active clients stood at 255. The company's geographical revenue break-up is as follows; America (76.8%), Europe (14.0%) and APAC (9.2%). Company's revenue share amongst industry segment: Banking and Capital markets (39.8%), Travel & Transportation (10.1%), Healthcare &...

Despite continued BFS headwinds, Hexaware's low-double digit (organic) growth trajectory is sustainable supported by IMS/BPM (no legacy) and driven by Automation, Cloud and Digital offerings. We expect strong synergies/cross sell from Mobiquity acquisition with portfolio augmentation across BFS, Healthcare and Retail verticals backed by robust partner ecosystem (AWS, Backbase). We build USD rev/EPS of 16/15% CAGR over CY18-21E. Key risks include escalation in client specific challenges (BFS) and low NN wins. We maintain BUY on Hexaware post its lower/inline rev/margin in 2QCY19. Mobiquity acquisition and cloud/automation led wins will support growth. Estimates and TP unchanged at Rs 445, at 16x Jun-21E EPS.

Hexaware's (HEXW) operating margins outperformed at 14.6% (+90bps QoQ vs. 30bps est.), taking the Jun'19 quarter ahead of expectations.

Hexaware Technologies (HEXW) recorded a strong 2QCY19, with revenue up 4.7% QoQ (5% QoQ in CC terms) to US$188.5mn. Adjusted for 15 day revenue impact for Mobiquity (acquired in Jun'19), USD revenue rose 2.8% QoQ, while CC revenue rose >3% QoQ. Growth components include volume growth of 3.9% QoQ and higher billing days of 1.1% QoQ, totalling 5% CC growth, while there was an adverse currency impact of 0.3% QoQ. Owing to healthy revenue growth, lower visa cost, improved billing rate, favourable delivery-mix, higher utilisation and cost efficiencies, EBIT margin rose 87bps QoQ to 14.6% (154bps above our estimate). Aided by higher margin, other income and lower tax rate, adjusted net profit surged by 21.5% QoQ with...

offshore mix & better utilization helped in improvement. We believe key negative for Hexaware is softness in BFS (41% of revenue) mainly focused in capital markets & buy side for new deals which have longer sales cycles. We...

We increase rev estimates by 5.6/9.2% for CY19/20E factoring the acquisition and lower organic growth in CY20 (loss of a large net-new deal). Our CY20E EPS is unchanged (14.5% EPS CAGR over CY18-21E). Maintain BUY, with TP of 440, 16x Jun-21E EPS. Organic acceleration is expected in 2HCY19, supported by strengthening of the Adobe/Pega ecosystem and on deal momentum. Hexaware has acquired Mobiquity Inc. for an all-cash consideration of USD 182mn (at 2.6x EV/rev). Mobiquity is a design and digital consulting firm (USD 70mn rev, growing at 24% CAGR) supported by strong partnerships with AWS and Backbase.

markets but lacks digital banking. Mobiquity will help HEXW to build digital banking solutions & Omni channel banking capability. Services offered by both companies are complementary to each other rather than competitive. We are estimating 18.7% USD revenue growth for HEXW which includes 24% growth in Mobiquity (USD47mn for 6.5 months) & organic growth of ~13% in CY19E & 18.5% USD revenue growth in CY20E. We cut our EBIT margins by 30bps/50bps for CY19/20E due to higher depreciation and slight lower margin business of Mobiquity. We expect lower other Income Led by USD130m...

Mobiquity is one of the largest independent customer experience consulting firms specializing in creating frictionless multi-channel digital experiences leveraging cloud technologies.

Background: Hexaware is a mid-cap IT company & a leading global provider of IT solutions. In 1QCY19: Revenue share from Application Development & Maintenance is (34.5%), Enterprise Services (9.5%), Testing (17.5%), Business Intelligence & Analytics (13.1%), BPS (7.6%) and Remote Infrastructure Management services (17.8%). The total headcount stands at 16,205 and number of active clients stood at 224. The company's geographical revenue break-up is as follows; America (76.1%), Europe (12.6%) and ROW (11.3%). Company's revenue share amongst industry segment: Banking and Capital markets (40.8%), Travel & Transportation (9.5%), Healthcare & Insurance (18.3%), Manufacturing (17.2%), and Professional Services (14.3%). Revenue concentration from major clients: Top 5 clients: (41.7%), Top 10 clients (51.1%)....

Hexaware's low-teens organic growth trajectory is sustainable supported by its IMS/BPM led growth strategy (negligible legacy). Strong deal wins with 20% growth in TCV (TTM) provides growth visibility including its largest net-new deal (USD 100mn Nordic) which ramps up in 4Q. Geo expansion in Europe/APAC also expected to support growth. We build USD rev/EPS CAGR of 13/14% over CY18-21E factoring flat margin trajectory. Valuations at 12.8x (discount to tier-2 IT) to be supported by 14% EPS CAGR (in-line with tier-2 IT), 40% RoIC and 5% FCF yield. Key risks include appreciation in INR, slowdown in BFS and value destructive acquisition. We maintain BUY on Hexaware post its inline 1QCY19. Estimates and TP unchanged at Rs 430, implying 16x Mar-21E EPS.