Hexaware Technologies Ltd. share price target

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.

Hexaware (HEXW) reported a softish operating performance in Q1CY19 with no respite on talent crunch issues. Attrition rose to 18.2% (+120bps QoQ/ 480bps YoY) and subcontracting expenses continued to weigh on margins. Management kept its CY19 guidance unchanged at 12-14% YoY revenue growth with stable operating margins. In our view, margin management remains an uphill task given supply constraints. We trim CY19-CY21 EPS estimates by 1-3%; on rolling valuations over to Mar'21, our target price holds at Rs 370....

1QCY19 CC revenue grew 2.0% QoQ, in line with our estimate of +2.2%. GPM declined 140bp QoQ to 30.2%, a new low (120bp miss), led by higher sub-contracting costs. But 100bp cut in SGA helped contain EBITDA margin (excluding ESOP) miss to 50bp at 15.3% v/s estimate of 15.8%. PAT 24 April 2019 declined 12.2% QoQ to INR1,385m, below our estimate of INR1,441m (+16.8% QoQ) due to lower operational income and forex losses (-INR81m v/s our estimate of +INR14m). This was partially offset by lower ETR (18.4% v/s expectation of 20.5%).

Hexaware's 1QCY19 results were broadly inline with our estimates. Hexaware Change in Estimates | Target | Reco has maintained its guidance of 12-14% organic revenue growth in CY19E, with...

Maintain BUY with TP of Rs 470, at 18x Dec-20E EPS. Hexawares 4Q was marked by strong deal bookings (highest-ever) and healthy revenue guidance, offset by operational roadblocks (margin, attrition). Revenue came at USD 176mn, 3.4/14.2% QoQ/YoY in CC terms. EBITDA% stood at 15.3%, -142bps QoQ on wage increase impact (-60bps), furlough impact (-60bps) and SG&A.; APAT was lower at Rs 1.23bn impacted by forex loss of Rs 0.25bn (vs. Rs 0.23bn forex gain in 3Q).

Hexaware delivered weak performance during Q4CY18 with miss on margins Change in Estimates | Target | Reco and PAT. Revenues came inline with our estimates. Management has given revenue (organic) growth guidance of 12-14% YoY for CY2019 which is inline...

Hexaware's 3.4% qoq CC growth was higher than our expectations, largely driven by a ramp-up in deals won in the previous quarters. Hexaware's revenue grew ~11.5% in CC terms in CY18 and it has guided for 12-14% CC organic growth for CY19. Improvement in revenue growth guidance (from 11-12% in CY18) is due to a bottomingout of client-specific issues and expected ramp-ups of deals won in H2CY18. However, challenges in its Enterprise Solutions service line (~10% of sales) still remain. largely due to wage hikes (60bps) and typical calendar seasonality in Q4CY18. Hexaware's margin-related commentary remained subdued as it expects margins similar to CY18 in CC terms despite an improvement in its growth outlook....

Maintain BUY with TP of Rs 560, at 22x Sep-20E EPS. Growth acceleration and >38% RoIC to support valuations. Hexaware posted lower than estimated revenue performance (furlough/ delayed ramp-up impact) and better operating performance (utilisation/offshore) in 3Q with continuity in IMS/BPM-led growth. Guidance cut to factor 3Q miss with revised rev guidance for CY18 at 11 to 12% YoY (12 to 13% earlier).

From operating metric perspective, RIMS business clocked a solid 8.3% QoQ growth on top of two successive quarters of double-digit sequential growth. Consistently maintaining a healthy performance, this business recorded 10% USD revenue CQGR over the past 8 quarters, clocking excellent average annualised growth of >46% over the same period. Analytics also grew by a healthy 9.2% QoQ, while BPO grew by 4.5% QoQ. Geographically, while Europe out-performed...

Driven by healthy 4.9% growth in volumes and strong growth in top-5 accounts, Hexaware posted 4.7% QoQ growth in consolidated revenue in CC terms in Q2CY18. Notwithstanding revenue and currency tailwinds, EBIT margin came in at disappointing 14% down by 10bps QoQ mainly impacted by lower utilisation and higher visa cost. Management raised its CY18 revenue and EPS growth guidance to 12-13% and 13-14%,...