Hexaware (ACCUMULATE, CMP Rs 214, TP Rs 240) Mar’17 qtr. results: Strong revenue performance; await details on unchanged revenue guidance

by Suman Gupta

Hexaware’s Mar’17 quarter results are quite strong with a 4.1% QoQ US$ revenue growth, much ahead of both street/our estimates. EBIT margins at 15.3%, are a tad better than estimates despite currency appreciation and reflect potential benefits from growth leverage. The company has reaffirmed its CY17 revenue guidance of double digit growth (company guided for a 10-12% growth for the year in Feb ’17) , which is decent relative to peers and continues to lend confidence to our sectoral thesis of Tier II companies seeing an uplift in operational/financial performance as client spending environment normalizes in CY17/FY18.

We currently have an ACCUMULATE rating with a TP of Rs 240. At CMP of Rs214, stock trades at 12.6/11.4x CY17E/CY18E P/E based on our EPS estimate of Rs16.8/18.8 for CY17/CY18E respectively. We do not see any material changes to our above consensus’ estimates for CY17/18. Mindtree and Hexaware are our top picks in the Tier II coverage universe as we continue to reiterate preference for Tier II techs over Tier I techs.

Mar’17 quarter result highlights: 

• Hexaware reported revenues at US$ 144.7mn (+4.1% QoQ, + 18.9% YoY) ahead of our expectations of 1.1% sequential US$ revenue growth. Constant currency revenue growth was 4% QoQ.
• EBIT margins at 15.3%, down 50bps sequentially V/s our expectations of 80bps decline. Gross margins were down 60 bps QoQ while SG&A expenses declined by 20 bps QoQ to 17.7%, resulting from growth leverage.
• Reported Profits at Rs 1,139 mn (-6.3% QoQ, +35% YoY) , in line with estimates despite slight beat on operational front on account of lower than expected other income.

Other highlights

Client metrics:

·         Top 5: 2.6% QoQ

·         Top 10: 2.9% QoQ

·         Non Top 10:5.9% QoQ 

Revenue by Geography

·         US:  +3% QoQ,

·         Europe : +3.2% QoQ

·         APAC: +20.4% QoQ

Revenue by delivery

·         Onsite revenues: 66.6% QoQ,

·          offshore revenues: 33.4% QoQ

DSO (including unbilled revenues): 74days, up 6 days Qo

Hexaware Mar’17 quarter result at a glance:

In Rs mn	Q1CY17A	Q4CY16	QoQ (%)	Q1CY16	YoY (%)	Q1CY17E
Reveneus (US$)	144.7	138.9	4.1	121.7	18.9	140.5
Net sales	9,605	9,409	2.1	8,202	17.1	9,371
Operating expenses	7982	7785		7008		7824
EBITDA	1,623	1,624	-0.1	1,194	35.9	1,547
Margins (%)	16.9	17.3	-40.0	14.6	230.0	16.5
Depreciation	157	140		138		145
EBIT	1,466	1,484	-1.2	1,056	38.8	1,402
Margins (%)	15.3	15.8		12.9		15.0
Forex Gains/(Losses)	16	126		44		105
Other income	12	14		11		16
Pre-tax profit	1,494	1,624	-8.0	1,111		1,522
Tax provided	355	408		269		381
Profit after tax	1,139	1,216		842		1,142
Emkay Net profit	1,139	1,216	-6.3	842	35.3	1,142
EPS, Rs	3.8	4.0		2.8		3.8