hexaware, 12th february, 2013

7/29/2019 Hexaware, 12th February, 2013

1/13

Please refer to important disclosures at the end of this report 1

EBITDA 85 110 (22.9) 99 (14.8)

EBITDA margin (%) 16.9 21.6 (477)bp 23.0 (615)bp

Source:Company, Angel Research; Note: *Excluding exceptional item

For 4QCY2012, Hexaware Technologies (Hexaware) reported broadly in-line set

of results. Overall volume of the company declined by 1.1% qoq due to sudden

project closure of one of the companys top clients. The company cited that work

from its top account remains intact outside of the project cancellation impacting

revenues in 4QCY2012 and 1QCY2013. The Management has guided for a

double digit revenue growth in CY2013 and expects revenue to grow by 1.7-2.4%

qoq in 1QCY2013.

For 4QCY2012, Hexaware reported USD revenue of

US$92.4mn, down 0.4% qoq. In INR terms, revenue came in at `502cr, down

1.0% qoq. The company witnessed a 477bp and 481bp qoq decline in its EBITDA

and EBIT margins to 16.9% and 15.1%, respectively, impacted majorly because of

challenges faced at one of its top clients. PAT came in at `66cr, down 21.2% qoq.

The Management indicated that the company remains

confident of growing in double digits in CY2013 and cited that work from its top

account remains intact outside of the project cancellation impacting revenues in

4QCY2012 and 1QCY2013. Also, the account should grow on a yoy basis in

CY2013. For 1QCY2013, the company has given revenue guidance of US$94-

95mn, which translates to sequential growth of 1.7-2.8%. To achieve full year

guidance of double digit growth (assuming 1QCY2013 revenues remain in the

middle of the guidance range), the company needs to clock ~4% CQGR for the

rest three quarters which looks a bit stretched. We expect the company to grow by

8.5% in CY2013; and post a USD and INR revenue CAGR of 9.3% and 9.8% over

CY201214E, respectively. The Management expects margins to improve by

~150-200bp qoq in 1QCY2013. The margin slide during 4QCY2012 is

expected to be recovered only gradually, however, as utilization picks up and

growth improves, we expect margins to improve going forward.

% chg 1.5 37.6 34.3 9.6 10.0

% chg (36.4) 212.9 22.8 (7.5) 17.7

EBITDA margin (%) 8.9 18.2 20.9 18.3 19.6

P/E (x) 29.2 9.4 7.7 8.3 7.1

P/BV (x) 2.5 2.4 2.0 1.7 1.5

RoE (%) 11.2 26.3 27.2 21.2 21.8

RoCE (%) 7.1 23.6 31.2 24.8 25.6

EV/Sales (x) 1.9 1.4 1.0 0.8 0.7

EV/EBITDA (x) 21.3 7.6 4.9 4.6 3.6

Source: Company, Angel Research; Note: *Excluding exceptional item

CMP `84

Target Price `113

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (447)

Bloomberg Code HEXW@IN

Shareholding Pattern (%)

Promoters 28.1

MF / Banks / Indian Fls 6.5

FII / NRIs / OCBs 39.6

Indian Public / Others 25.8

Abs. (%) 3m 1yr 3yr

Sensex 4.2 9.6 20.5

Hexaware (25.4) (23.2) 123.2

19,461

5,898

HEXT.BO

307,530

BSE Sensex

Nifty

Reuters Code

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

2,454

1.1

2

142/73

+91 22 39357800 Ext: 6819

[email protected]

Performance highlights

4QCY2012 Result Update | IT

February 11, 2013


2/13

Hexaware | 4QCY2012 Result Update

February 11, 2013 2

Exhibit 1:4QCY2012 performance (Indian GAAP, Consolidated)

Direct costs 321 307 4.7 256 25.3 1,185 894 32.5Gross profit 181 201 (9.7) 176 3.2 764 557 37.2

SG&A expenses 97 91 6.2 76 26.6 356 292 22.0

Dep. and amortization 9 9 1.1 6 41.3 32 25 30.8

EBIT 76 101 (25.0) 93 (18.6) 375 240 56.4

Other income 9 9 12 40 43

Forex gain (5) (4) (5) (11) 25

PBT 81 107 (24.3) 99 (18.8) 404 308 31.4

Tax 14 23 (36.0) 11 29.7 76 41 87.7

Exceptional item - - - - -

Final PAT 66 84 (21.2) 88 328 267 22.8

Gross margin (%) 36.1 39.6 (347)bp 40.7 (459)bp 39.2 38.4 82bp

EBITDA margin (%) 16.9 21.6 (477)bp 23.0 (615)bp 20.9 18.2 267bp

EBIT margin (%) 15.1 19.9 (481)bp 21.6 (647)bp 19.2 16.5 271bp

PAT margin (%) 13.1 16.4 (332)bp 20.1 (708)bp 16.6 17.6 (101)bp

Source: Company, Angel Research; Note: * Excluding exceptional item

Exhibit 2:Actual vs Angel estimates

Net revenue 502 496 1.3

EBITDA margin (%) 16.9 16.4 46bp

PAT 66 61 8.5

Source: Company, Angel Research

In-line performance

For 4QCY2012, Hexaware reported USD revenue of US$92.4, down 0.4% qoq,

majorly because of 1.1% qoq volume decline. This was because the company

witnessed change in project scope and deliverables from a large client, which isamongst the companys top-10 clients. The Management indicated that the decline

in revenue of this large client (by 21.3% qoq to US$10.8mn) in 4QCY2012 is a

temporary blip and expects this account to grow on a yoy basis in CY2013. In INR

terms, the revenue came in at `502cr, down 1.0% qoq.

During the quarter, the company reported a slight improvement of ~1% in its

onsite and offshore bill rates to US$74.3/hour and US$23.2/hour. The

Management indicated that on a broader basis the company expects billing rates

to remain stable. Increase in bill rates aided the companys revenues by 36bp qoq.


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February 11, 2013 3

Exhibit 3:Trend in revenue growth (qoq)


Exhibit 4:Trend in billing rates


Service vertical wise, the companys growth was led by testing (contributed 11.6%

to revenue) and business intelligence (BI) & analytics (contributed 12.8% to

revenue), revenue of which grew by a whopping 17.9% and 9.9% qoq,

respectively. This was followed by infrastructure management services (IMS), therevenue of which grew by 7.1% qoq. Hexawares anchor service vertical,

application development and maintenance (ADM; contributed 35.8% to revenue)

reported a 7.2% qoq decline in its revenue, majorly because of pressure seen at

one of its top client. Revenue from BPO and enterprise solutions declined by 7.4%

and 2.1% qoq, respectively. Enterprise services cooled off following a very strong

2QCY2012 in which it grew by 15.8% qoq, while BPO has now declined in four

out of the last five quarters. Going forward, the Management indicated that it is

witnessing strong traction for services such as enterprise solutions, BI and IMS.

84.1

88.0

91.292.8 92.4

6.7

4.7

3.6

1.7(0.4)

4.8

6.6

4.2

1.7

(1.1)(2)

0

2

4

6

8

60

65

70

75

80

85

90

95

4QCY11 1QCY12 2QCY12 3QCY12 4QCY12

(%)

(US$mn)

Revenue (US$ mn) Revenue grow th -qoq (%) Volume growth - qoq (%)

73.01 73.90 73.50 73.54 74.27

23.00 22.90 22.85 22.97 23.16

10

20

30

40

50

60

70

80


(US$/hr)

Onsite Offshore


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February 11, 2013 4

Exhibit 5:Growth trend in service verticals

ADM 35.8 (7.2) (0.9)

Enterprise solutions 30.1 (2.1) 11.0Testing 11.6 17.9 18.0

BI and analytics 12.8 9.9 33.9

BPO 4.0 (7.4) (13.8)

IMS 5.7 7.1 52.7


Industry segment wise, once again banking and capital markets posted modest

growth with the segments revenue growth coming in at 3.9% qoq. The company

expects this segment to grow at a higher rate than the companys average growth

rate in CY2013. Healthcare and insurance led the companys growth by posting

6.8% qoq revenue growth. Revenue growth from travel and transportation againstood muted at 0.1% qoq. Hexaware added two new clients each in banking &

capital markets and healthcare & insurance industry segments and one client in

the travel and transportation industry segment.

Exhibit 6:Growth trend in industry segments

Banking and capital market 33.7 3.9 29.9

Healthcare and insurance 16.3 6.8 9.2

Travel and transportation 20.2 0.1 7.2

Emerging segments 29.8 (8.4) (4.8)


Geography wise, growth was again led by America, the revenue from where grew

by 5.8% qoq while revenues from Europe declined by 15.7% qoq. The company,

however, maintained that Europe remains stable.

Exhibit 7:Growth trend in geographies

Americas 69.2 5.8 18.1

Europe 23.2 (15.7) (11.2)

Asia Pacific 7.6 0.9 21.0Source: Company, Angel Research

Hiring and utilization

During 4QCY2012, Hexaware reported net reduction of 74 employees, taking its

total employee base to 9,069. Out of the total reduction, 68 employees were

reduced from its technical employee base, taking the total technical employee base

to 8,371. Attrition rate during 4QCY2012 inched up slightly to 8.7% from 8.4% in

3QCY2012. The Management indicated that the companys current focus is to

improve utilization level, thus implying that hiring will be demand based in the

near-term.


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February 11, 2013 5

Exhibit 8:Employee metrics

Technical

Onsite 1,564 1,595 1,624 1,728 1,750Offshore 6,063 6,330 6,419 6,711 6,620

Net technical emp. addition 140 299 118 396 (68)

Net addition (overall) 153 307 109 410 (74)

Attrition (%) 13.9 11.0 9.6 8.4 8.7


Utilization level, including trainees, declined by 370bp qoq to 63.9% (lowest level

in last five years) in 4QCY2012 from 67.6% in 3QCY2012. Improving utilization

from current levels will be an important margin level for the company going

ahead.

Exhibit 9:Utilization trend


Margins decline

During 3QCY2012, the company witnessed a 477bp and 481bp qoq decline in itsEBITDA and EBIT margins to 16.9% and 15.1%, respectively, impacted majorly

because of challenges faced at one of its top clients. The margin movement was

because of following factors: 1) 216bp qoq negative impact due to decline in

utilization level, 2) 49bp qoq negative impact due to onsite effort shift, 3) 22bp

qoq positive impact from increase in bill rates, 4) 130bp negative impact due to

increase in SG&A costs, and 5) 90bp negative impact from some other costs.

Hexaware has guided for 150-200bp qoq increase in margins in 1QFY2013 by

using levers such as increasing utilization level and shifting the revenue mix

offshore.

70.6

69.7

68.6

70.0

67.6

63.9

62

63

64

6566

67

68

69

70

71

72

3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12

(%)

Utilization - incl. trainees (%)


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February 11, 2013 6

Exhibit 10:Margin profile


Client pyramid

During 4QCY2012, Hexaware added 11 new clients three from America, two

from Europe and six from the APAC region. From a service vertical perspective, five

clients were added in enterprise solutions, three in testing and one in BI and

analytics. The company added one client in the US$10mn-20mn revenue bracket.

The active client base of the company increased to 218 in 4QCY2012 from 217 in

3QCY2012. The revenue from the companys top client declined by 21.3% qoq

(impacted adversely by cancellation of a large engagement within that client),

while revenues from top 2-5 clients grew by 12.5% qoq. Revenue from non top-10clients declined by 0.8% qoq.

Exhibit 11:Client metrics

US$1mn5mn 40 42 44 43 40

US$5mn10mn 7 7 7 7 7

US$10mn20mn 2 3 3 4 5

US$20mn plus 3 3 3 3 3

Total clients billed 192 201 210 217 218

Clients added 15 12 12 12 11


Outlook and valuation

The Management indicated that the company remains confident of growing in

double digits in CY2013 and intends to retain ~50% dividend payout policy going

ahead. The company cited that work from its top account remains intact outside of

the project cancellation impacting revenues in 4QCY2012 and 1QCY2013. Also,

the account should grow on a yoy basis, despite US$3mn revenue loss in

4QCY2013. The company expects top-10 clients to continue contributing over

50% of overall revenues and new customers to contribute between 5-7% of

revenues. The company is currently chasing 2-3 large deals in the pipeline and is

currently in advanced stage of discussion in one of them. In addition, Oracle is

expected to release its new version of Peoplesoft in CY2013. While this is expected

40.7 41.3

40.1 39.636.1

23.0 22.4 22.9 21.6

16.921.6

20.8 21.4 19.9

15.1

5

10

15

20

25

30

35

40

45


(%)

Gross margin EBITDA margin EBIT margin


7/13


February 11, 2013 7

to drive upgrade-driven revenues for Hexaware, the same are anticipated accruing

largely in CY2014 and some revenue may accrue towards the end of CY2013.

For 1QCY2013, the company has given revenue guidance of US$94-95mn which

translates to sequential growth of 1.7-2.8%. To achieve full year guidance of

double digit growth (assuming 1QCY2013 revenues remain in the middle of the

guidance range), the company needs to clock ~4% CQGR for the rest three

quarters which looks a bit stretched as this will require large deal wins. We expect

the company to grow by 8.5% in CY2013. We expect the company to post a USD

and INR revenue CAGR of 9.3% and 9.8% over CY201214E, respectively.

On the margin front, the Management expects margins to improve by ~150-

200bp qoq in 1QCY2013. The margin slide during 4QCY2012 is expected to be

recovered only gradually, however, as utilization picks up and growth improves

(aided by Peoplesoft upgrades), we expect margins to improve going forward. We

expect EBITDA and PAT to post a CAGR of 6.2% and 4.3%, respectively. At the

current market price, the stock is trading at a PE of 7.1x CY2014E EPS of `12.0.

Exhibit 12:Key assumptions

Revenue growth USD terms (%) 8.5 10.0

USD-INR rate 54.0 54.0

Revenue growth INR terms (%) 9.6 10.0

EBITDA margin (%) 18.3 19.6Tax rate (%) 21.0 22.0

EPS growth (%) (7.6) 17.7


Exhibit 13:Change in estimates

Net revenue 2,118 2,136 0.9 2,350 2,350 -

EBITDA 403 392 (2.7) 460 460 -Other income 41 44 8.9 54 54 -

PBT 406 384 (5.6) 457 457 -

Tax 85 81 (5.6) 101 101 -

PAT 321 303 (5.6) 357 357 -



8/13


February 11, 2013 8

Exhibit 14:One-year forward PE(x) chart


Exhibit 15:Recommendation summary

HCL Tech Accumulate 669 765 14.4 20.7 12.7 13.6 1.5 22.9

Infosys Neutral 2,791 - - 28.8 16.1 5.9 2.9 21.3

Infotech Enterprises Accumulate 163 184 12.8 17.4 8.4 10.3 0.5 13.6

KPIT Cummins Buy 110 140 27.8 15.2 8.6 16.9 0.7 20.5

Mahindra Satyam Accumulate 119 126 5.7 19.8 10.5 3.7 1.2 23.7MindTree Accumulate 783 868 10.9 19.3 9.0 17.4 0.9 21.7

Mphasis Accumulate 348 396 13.7 17.5 9.2 0.0 0.7 13.5

NIIT^ Buy 26 36 39.5 10.9 4.2 (2.7) 0.1 14.1

Persistent Neutral 534 - - 24.1 9.9 15.1 1.1 18.0

TCS Neutral 1,414 - - 28.9 17.9 13.3 3.7 29.7

Tech Mahindra Accumulate 996 1,105 10.9 19.6 9.0 7.9 1.7 22.3

Wipro Neutral 410 - - 19.4 14.8 6.8 1.7 17.9

Source: Company, Angel Research; Note: Valued on SOTP basis

Company Background

Hexaware is a mid-cap Indian IT company and is the 18th largest Indian software

exporter according to Nasscom 2010 rankings. Under the leadership of Chairman

Mr Atul Nishar and Vice Chairman and CEO Mr Chandrashekar (ex-Wipro

Technologies), Hexaware has differentiated itself from its peers and built a niche

position in the airlines vertical and in PeopleSoft implementation. Hexaware offers

its services to clients mainly in the BFSI and travel and transportation industries.

0

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Aug-10

Jan-11

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(`)

Price 16x 13x 9x 5x 2x


9/13


February 11, 2013 9

Profit and loss statement (Indian GAAP, Consolidated)

Direct costs 692 894 1,185 1,355 1,468Gross profit 363 557 764 781 883

% to revenues 34.4 38.4 39.2 36.5 37.6

SG&A expenses 269 292 356 389 423

% to revenues 25.5 20.1 18.3 18.2 18.0

% to revenues 8.9 18.2 20.9 18.3 19.6

Depreciation and amort. 24 25 32 37 41

% to revenues 2.3 1.7 1.7 1.8 1.8

EBIT 70 240 375 354 419

% to revenues 6.6 16.5 19.2 16.6 17.8

Other income 50 43 40 44 54

Forex gain (25) 25 (11) (15) (15)

PBT 95 308 404 384 457

Tax 9 41 76 81 101

% of PBT 9.8 13.2 18.9 21.0 22.0

PAT 85 267 328 303 357

Exceptional item 22 - - - -

EPS (`) - diluted 2.9 8.9 10.9 10.1 11.9


10/13


February 11, 2013 10

Balance sheet (Indian GAAP, Consolidated)

Share capital 29 59 59 59 59

Reserves 934 1,061 1,221 1,371 1,574

Forex MTM 26 (104) (76) - -

Borrowings 11 - - - -

Gross fixed assets 560 648 719 769 829

Less: Accumulated depreciation 152 170 199 237 278

Net fixed assets 408 479 520 533 551

Cash and cash equivalent 475 461 447 666 788

Debtors 192 299 365 404 444

Current assets - forex MTM 21 - - - -

Others 142 195 226 256 282

Current liability - forex MTM - 88 22 46 20

Other current liabilities 255 345 339 390 422

Deferred tax 17 16 7 7 10


11/13



Cash flow statement (Indian GAAP, Consolidated)

Pre-tax profit from operations 70 240 375 354 419

Depreciation 24 25 32 37 41

Pre tax cash from operations 94 265 407 392 460

Other income/prior period ad 25 68 29 29 39

Net cash from operations 119 332 436 421 498

Tax 9 41 76 81 101

Cash profits 109 292 360 340 398

(Inc)/dec in current assets (91) (139) (97) (69) (66)

Inc/(dec) in current liabilities (16) 155 (71) 74 6

Net trade working capital (107) 16 (168) 5 (60)

(Inc)/dec in fixed assets 4 (95) (74) (50) (60)

(Inc)/dec in deferred tax asset (6) 1 9 - (3)

Inc/(dec) in other non-current liabilities 67 (130) 28 76 -

Inc/(dec) in debt (5) (11) - - -

Inc/(dec) in equity/premium 39 50 16 - -

Dividends (51) (136) (184) (153) (153)

Cash generated/(utilized) 49 (15) (13) 219 122

Cash at start of the year 426 475 461 447 666


12/13



Key ratios

P/E 29.2 9.4 7.7 8.3 7.1

P/CEPS 18.6 8.4 6.8 7.2 6.2

P/BVPS 2.5 2.4 2.0 1.7 1.5

Dividend yield (%) 1.8 5.5 7.5 6.2 6.2

EV/Sales 1.9 1.4 1.0 0.8 0.7

EV/EBITDA 21.3 7.6 4.9 4.6 3.6

EV/Total assets 2.0 2.0 1.7 1.3 1.0

EPS 2.9 8.9 10.9 10.1 11.9

Cash EPS 4.5 10.0 12.3 11.6 13.6

Dividend 1.5 4.7 6.3 5.2 5.2

Book value 33.0 34.7 41.2 48.9 55.8

Tax retention ratio (PAT/PBT) 0.9 0.9 0.8 0.8 0.8

Cost of debt (PBT/EBIT) 1.4 1.3 1.1 1.1 1.1

EBIT margin (EBIT/Sales) 0.1 0.2 0.2 0.2 0.2

Asset turnover ratio (Sales/Assets) 1.1 1.4 1.6 1.5 1.4

Leverage ratio (Assets/equity) 1.0 0.9 0.9 1.0 1.0

Operating ROE 9.1 23.8 25.6 21.2 21.8

RoCE (pre-tax) 7.1 23.6 31.2 24.8 25.6

Angel RoIC 13.9 43.2 49.6 46.4 49.5RoE 11.2 26.3 27.2 21.2 21.8

Asset turnover (fixed assets) 2.6 3.0 3.7 4.0 4.1

Debtor days 66 75 68 69 69


13/13


F b 11 2013 13

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Hexaware

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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hexaware, 12th february, 2013

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