(HEXW IN, HOLD, Mcap: Rs 71bn; CMP: Rs 236, TP: Rs 256 Upside 8%)
Analyst: Shyamal Dhruve, +91-22-6184 4313, shyamal.dhruve@karvy.com
Hexaware's revenue performance was way below our as well as consensus estimates. Various factors like soft calendar, higher furloughs and Chennai floods impacted revenue growth in this quarter, resulting in USD revenue de-growth of 0.8% QoQ at $124.1mn. Volume declined 0.1% QoQ while blended pricing increased 0.6% QoQ. EBITDA margin decline of 195bps QoQ was due to Chennai impact, bonus payment due to change in law and CSR activities. CY15 New deal signing remained healthy at $120mn. For CY15, it managed to post industry-leading growth (at 17.6%) while management remained confident of beating the industry growth rate for CY16 as well. We, though, remain apprehensive on the growth rate given the high concentration on its top clients. We upgrade our rating from "SELL" to "HOLD" as we roll-over to CY17E with our revised Target Price of Rs 256 based on 14xCY17E earnings.
Soft revenue performance: Hexaware reported revenues of US$124.1mn, down 0.8% QoQ, +8.4% YoY. In constant currency terms, it reported de-growth of 0.5% QoQ. Top 10 clients continued to remain soft (-0.3% QoQ) mainly due to budget issues faced by its top client. For CY15, it reported USD revenue of 496.8mn, a growth of 17.6% YoY.
EBITDA dragged due to lower billing days, wage hike: EBITDA margin for the quarter declined 195bps QoQ at 15.9% due to the change in wage hike cycle to onsite employees from January to Oct quarter. Company granted RSUs worth Rs 8mn to its employees during the quarter. Ex-ESOPs, margin declined 320bps QoQ to 16.0%. Management indicated ESOP to continue in the similar range for the next few quarters.
Outlook & Valuation: Hexaware has been delivering consistent performance on revenue front every passing quarter with decent dividend payout. However, softness in this quarter was mainly due to the Chennai impact and higher furloughs. We factor in 11.5%/14.5% USD revenue growth for CY16E/17E. Currently, the stock is trading at 14.9x/12.9x CY16E/CY17E earnings respectively. We upgrade our rating from "SELL" to "HOLD" as we roll-over to CY17E with our revised Target Price of Rs 256 based on 14xCY17E earnings.
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