hexaware, 2q cy 2013

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

Y/E December (` cr) 2QCY13 1QCY13 % chg (qoq) 2QCY12 % chg (yoy)Net revenue 537 508 5.7 500 7.3EBITDA 127 98 30.0 115 11.0

EBITDA margin (%) 23.7 19.3 444bp 22.9 79bp

PAT* 98 79 23.5 89 10.0Source:Company, Angel Research; Note: *Excluding exceptional item

For 2QCY2013, Hexaware Technologies (Hexaware) reported broadly in-line set

of results on the revenue front but exceeded expectations on the operating margin

as well as on the bottom-line front. The overall volume of the company came in at

1.5% qoq. The operating margin grew by more than 440bp on a sequential basis

which was a major surprise. The Management has given a 3.5-5.5% qoq

USD revenue growth for 3QCY2013, which is higher than our expectation of

2-4%. We maintain our Buy rating on the stock.Quarterly highlights: For 2QCY2013, Hexaware reported a USD revenue ofUS$94.8mn, up 0.8% qoq. In INR terms, revenue came in at `537cr, up 5.7%

qoq. The company witnessed a 444bp and 452bp qoq increase in its EBITDA and

EBIT margins to 23.7% and 22.0%, respectively. The pickup in operating margin

was driven by an ~140bp qoq gain due to forex, 70bp qoq gain due to absence

of visa cost (which was incurred last quarter) and 150bp qoq gain due to

one-time reversal of a cost. The PAT stood tall at `98cr, up 23.5% qoq, aided by

gains due to strong operational performance.

Outlook and valuation: For 3QCY2013, the Management has given a USDrevenue guidance of US$98.1-100mn, which implies a growth rate of 3.5-5.5%;

better than our estimates of 2-4%. The company is chasing four deals with a TCV

of US$25m+ each and two deals with a TCV of US$10m+. It expects to close at

least two of these deals by the next quarter. Hexaware has been slowly clawing its

way back to growth after a tepid performance on large deal signings over the

past few quarters and headwinds in its top account. The 3QCY2013 guidance and

outlook on large deal pipelines suggest greater likelihood of growth acceleration

going forward. We expect the company to post a USD and INR revenue CAGR of

6.6% and 10.0% over CY201214E, respectively. We expect the EBITDA margin to

remain at 21.5% and 20.5% in CY2013 and CY2014, respectively from 20.9% in

CY2012. We value the company at 9.5x CY2014E EPS of `12.9, which gives us atarget price of `123. We maintain our Buy rating on the stock.Key financials (Indian GAAP, Consolidated)

Y/E Dec. (` cr) CY2010 CY2011 CY2012 CY2013E CY2014ENet sales 1,055 1,451 1,948 2,213 2,479% chg 1.5 37.6 34.3 13.6 12.0

Net profit 108 267 328 365 388% chg (19.7) 147.8 22.8 11.3 6.4

EBITDA margin (%) 8.9 18.2 20.9 21.5 20.5

EPS (`)* 2.9 8.9 10.9 12.1 12.9P/E (x) 37.1 12.0 9.8 8.8 8.3

P/BV (x) 3.2 3.1 2.6 2.2 1.9

RoE (%) 11.2 26.3 27.2 25.4 23.5

RoCE (%) 7.1 22.8 30.0 29.4 27.3

EV/Sales (x) 2.5 1.9 1.5 1.2 1.1

EV/EBITDA (x) 28.4 10.4 7.2 5.8 5.2

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

BUYCMP `107

Target Price `123

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (562)

Bloomberg Code HEXW@IN

Shareholding Pattern (%)

Promoters 27.9

MF / Banks / Indian Fls 10.4

FII / NRIs / OCBs 36.2Indian Public / Others 25.5

Abs. (%) 3m 1yr 3yr

Sensex 6.0 16.6 12.4

Hexaware 21.9 (6.9) 157.5

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

3,116

0.7

2

142/73

BSE Sensex

Nifty

Reuters Code

20,150

6,029

HEXT.BO

335,470

Ankita Somani+91 22 39357800 Ext: 6819

[email protected]

HexawarePerformance highlights

2QCY2013 Result Update | IT

July 19, 2013

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Hexaware | 2QCY2013Result Update

July 19, 2013 2

Exhibit 1:2QCY2013 performance (Indian GAAP, Consolidated)

Y/E December (` cr) 2QCY13 1QCY13 % chg (qoq) 2QCY12 % chg (yoy) 1HCY13 1HCY12 % chg (yoy)Revenue 537 508 5.7 500 7.3 1,044 938 11.3Direct costs 325 316 2.8 300 8.6 641 557 15.2Gross profit 211 192 10.4 201 5.4 403 382 5.6

SG&A expenses 84 94 (10.1) 86 (2.1) 178 169 5.4

EBITDA 127 98 30.0 115 11.0 225 213 5.8Dep. and amortization 9 9 1.1 8 23.7 19 15 27.2

EBIT 118 89 33.1 107 10.1 207 198 4.2

Other income 10 10 10 20 22

Forex gain (4) 2 (6) (2) (3)

PBT 124 100 23.6 112 10.8 225 217 3.5

Tax 26 21 24.2 23 13.9 47 40 19.7

PAT 98 79 23.5 89 10.0 177 177 (0.1)Exceptional item - - - - -

Final PAT 98 79 23.5 89 10.0 177 177 (0.1)Diluted EPS* 3.3 2.6 23.5 3.0 10.1 5.9 5.9 -Gross margin (%) 39.4 37.7 168bp 40.1 (72)bp 38.6 40.7 (207)bp

EBITDA margin (%) 23.7 19.3 444bp 22.9 79bp 21.6 22.7 (112)bp

EBIT margin (%) 22.0 17.5 452bp 21.4 56bp 19.8 21.1 (135)bp

PAT margin (%) 18.0 15.3 277bp 17.6 41bp 16.7 18.5 (185)bp

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

Exhibit 2:Actual vs Angel estimates

(` cr) Actual Estimate % VarNet revenue 537 543 (1.2)

EBITDA margin (%) 23.7 20.7 298bp

PAT 98 82 18.7

Source: Company, Angel Research

In-line revenues, margins ahead of estimates

For 2QCY2013, Hexaware reported a USD revenue of US$94.8mn (at the lower

end of the companys guided band of US$94-96mn), up 0.8% qoq, mainly led by

a 1.5% qoq volume growth. The break-up of revenue growth is as follows: 1)volume growth: +1.5% qoq, 2) forex impact: -0.34% qoq and price realization: -

0.36%. In INR terms, the revenue came in at `537cr, up 5.7% qoq.

During the quarter, the companys offshore bill rates remained almost stable qoq

at US$23.40/hour, while its onsite bill rates declined by 0.8% to US$73.06/hour.

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

rates to remain stable.

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July 19, 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 13% to

revenue), the revenue from which grew by 9.2% qoq. BI and analytics continued to

decline for a second consecutive quarter (-6.6% qoq), and has remained volatile in

the past five quarters, with revenues ranging between US$9-12mn. Applicationdevelopment and maintenance (ADM) the companys anchor service vertical,

contributed 38.1% to revenue, and its revenue grew by 1.3% qoq. Revenue from

enterprise solutions (contributed 29.0% to revenues) grew by 0.4% qoq.

91.2

92.892.4

94.0

94.83.6

1.7

(0.4)

1.8

0.8

4.2

1.7

(1.1)

1.9 1.5

(2)

0

2

4

6

89

90

91

92

93

94

95

96

2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

(%)

(US$mn)

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

73.50 73.54 74.27 73.64 73.06

22.85 22.97 23.16 23.37 23.40

10

20

30

40

50

60

70

80


(US$/hr)

Onsite Offshore

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July 19, 2013 4

Exhibit 5:Growth trend in service verticals

Service verticals % to revenue % chg (qoq) % chg (yoy)ADM 38.1 1.3 3.3

Enterprise solutions 29.0 0.4 (6.8)

Testing 13.0 9.2 51.7

BI and analytics 10.2 (6.6) (0.1)

BPO 4.3 0.8 (7.0)

IMS 5.4 (4.5) 10.0


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

growth with the segments revenue growth coming in at 4.0% qoq. The company

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

rate in CY2013. Revenue from healthcare & capital markets insurance and travel

& transportation industry segment remained stable on a qoq basis. The company

added four new clients in the banking & financial markets vertical and one each in

healthcare & insurance and travel & transportation industry segments.

Exhibit 6:Growth trend in industry segments

Industry segments % to revenue % chg (qoq) % chg (yoy)Banking and financial markets 35.5 4.0 28.5

Healthcare and insurance 15.9 0.1 1.3

Travel and transportation 19.5 0.3 2.3

Emerging segments 29.1 (2.3) (14.1)


In terms of geographies, growth came from developed economies such as the US

and Europe, the revenues from which grew by 1.2% and 0.8% qoq, respectively.

Hexaware is confident of healthy growth in Europe and expects it to ably support

the favorable environment of America.

Exhibit 7:Growth trend in geographies

% to revenue % chg (qoq) % chg (yoy)Americas 67.1 1.2 10.1

Europe 26.3 0.8 (6.5)

Rest of the World (RoW) 6.6 (3.6) (8.6)


Hiring and utilization

During 2QCY2013, Hexaware reported a net addition of 30 employees, taking its

total employee base to 8,700. Out of the total addition, 28 employees were added

in its technical employee base, taking the total technical employee base to 7,978.

Attrition rate during 2QCY2013 moved up to 11.0% from 9.9% in 1QCY2013.

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July 19, 2013 5

Exhibit 8:Employee metrics

Particulars 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13Technical

Onsite 1,485 1,563 1,551 1,569 1,636Offshore 6,558 6,866 6,820 6,381 6,342

Total technical employees 8,043 8,430 8,371 7,950 7,978Net technical emp. addition 118 387 (59) (420) 28

Net addition (overall) 109 410 (74) (399) 30

Total employees 8,733 9,143 9,069 8,670 8,700Attrition (%) 9.6 8.4 8.7 9.9 11.0


Utilization level, including trainees, inched up slightly by 30bp qoq to 70.9%,

which proved out to be one of the margin levers in this quarter.

Exhibit 9:Utilization trend


Margins improve substantially

During 2QCY2013, the company witnessed a 444bp and 452bp qoq increase in

its EBITDA and EBIT margins to 23.7% and 22.0%, respectively. The pickup in

operating margin was driven by an ~140bp qoq gain due to forex, 70bp qoqgain due to absence of visa cost (which was incurred last quarter) and 150bp qoq

gain due to one-time reversal of a cost.

The gross profit margin of the company expanded by 170bp qoq to 39.4%; the

break-up of which is as follows: 1) 95bp qoq due to favourable forex movement,

2) 70bp qoq positive impact due to absence of one time visa cost which was

incurred in 1QCY2013 and 3) 5bp qoq gain due to other factors including

utilization.

68.6

70.0

67.6

63.9

70.6 70.9

62

6364

65

66

67

68

69

70

71

72

1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

(%)

Utilization - incl. trainees (%)

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July 19, 2013 6

Exhibit 10:Margin profile


Client pyramid

During 2QCY2013, Hexaware added 14 new clients seven from America, two

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

seven clients were added in enterprise solutions, three in BI & Analytics and four in

the BPO service vertical. The active client base of the company stood at 219. The

revenue from the companys top client revived and came in at US$13.1mn (after

falling to US$10.8m in 4QCY2012), though still below US$13.7m reported in

3QCY2012. The Management expects contribution from the top client to return to

~15% of revenues by 4QCY2013 (14.8% in 3QCY2012, 11.7% in 4QCY2012,13.1% in 2QCY2013). Revenue from the top 2-5 clients grew by 2.0% while that

from non top-10 clients declined by 3.2% qoq.

Exhibit 11:Client metrics

No. of clients 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13US$1mn5mn 44 43 40 40 37

US$5mn10mn 7 7 7 7 8

US$10mn20mn 3 4 5 5 5

US$20mn plus 3 3 3 3 3

Total clients billed 210 217 218 216 219

Clients added 12 12 11 11 14


Outlook and valuation

For 3QCY2013, the Management has given a USD revenue guidance of

US$98.1-100mn, which implies a growth rate of 3.5-5.5% while the same is

higher than our estimate of 2-4%. The company is chasing four deals with a

TCV of US$25m+ each and two deals with a TCV of US$10m+. It expects to

close at least two of these deals by the next quarter. While the guidance

nearly rules out double-digit USD revenue growth in CY2013 (the companys

earlier forecast), the Management cited expectations of a better 2HCY2013

as compared to a tepid 1HCY2013.

40.1 39.636.1

37.7 39.4

22.921.6

16.919.3

23.7

21.419.9

15.117.5

22.0

5

10

15

20

25

30

35

40

45


(%)

Gross margin EBITDA margin EBIT margin

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July 19, 2013 8

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


Exhibit 15:Recommendation summary

Company Reco CMP Tgt Price Upside FY2015 FY2015E FY2012-15E FY2015E FY2015E(`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (%) RoE (%)

HCL Tech Neutral 893 870 (2.5) 22.0 14.1 20.7 1.6 21.7

Hexaware Buy 107 123 15.3 20.5 8.3 13.1 1.1 23.5Infosys Neutral 2,846 2,820 (0.9) 26.4 15.0 9.2 2.5 19.3

Infotech Enterprises Accumulate 178 190 6.8 17.6 7.9 15.7 0.5 14.0

KPIT Cummins Accumulate 130 144 10.5 16.7 9.0 21.6 0.7 16.7

MindTree Accumulate 943 1050 11.4 19.9 9.0 25.1 0.9 20.3Mphasis Neutral 408 400 (1.9) 18.2 9.4 4.9 0.7 14.2

NIIT^ Buy 18 30 68.1 9.1 3.3 (7.1) (0.0) 11.9

Persistent Accumulate 528 595 12.8 26.2 8.8 19.0 0.8 16.7

TCS Neutral 1,742 1,760 1.0 29.1 18.3 20.5 3.6 27.8

Tech Mahindra Accumulate 1,131 1,250 10.6 19.1 9.7 11.4 1.6 18.9

Wipro Neutral 391 389 (0.4) 21.4 13.1 9.7 1.5 19.0

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

20

40

60

80

100

120140

160

180

Jan-06

Jun-06

Nov-06

Apr-07

Sep-07

Feb-08

Jul-08

Dec-08

May-09

Oct-09

Mar-10

Aug-10

Jan-11

Jun-11

Nov-11

Apr-12

Sep-12

Feb-13

Jul-13

(`)

Price 14x 11x 8x 5x 2x

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July 19, 2013 9

Profit and loss statement (Indian GAAP, Consolidated)

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014ERevenues 1,055 1,451 1,948 2,213 2,479Direct costs 692 894 1,185 1,358 1,526Gross profit 363 557 764 855 954

% to revenues 34.4 38.4 39.2 38.6 38.5

SG&A expenses 269 292 356 379 445

% to revenues 25.5 20.1 18.3 17.1 17.9

EBITDA 94 265 407 476 509% to revenues 8.9 18.2 20.9 21.5 20.5

Depreciation and amort. 24 25 32 40 45

% to revenues 2.3 1.7 1.7 1.8 1.8

EBIT 70 240 375 436 464

% to revenues 6.6 16.5 19.2 19.7 18.7

Other income 50 43 40 42 53

Forex gain (25) 25 (11) (14) (19)

PBT 95 308 404 463 498

Tax 9 41 76 99 109

% of PBT 9.8 13.2 18.9 21.3 22.0

PAT 85 267 328 365 388

Exceptional item 22 - - - -

Adj. PAT 108 267 328 365 388EPS (`) - diluted 2.9 8.9 10.9 12.1 12.9

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July 19, 2013 10

Balance sheet (Indian GAAP, Consolidated)

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014ELiabilitiesShare capital 29 59 59 59 59

Reserves 910 958 1,145 1,376 1,595

Forex MTM 26 - - - -

Share ap. money - - 0 0 0

Total shareholders' funds 965 1,016 1,204 1,436 1,654Long term provisions - 20 27 27 27

Deferred tax liability (net) - 3 13 13 13

Borrowings 11 - - - -

Other long term liabilities - 12 8 8 8

Total liabilities 977 1,052 1,252 1,484 1,702AssetsGross fixed assets 560 647 719 769 819

Less: Accumulated dep. 152 170 199 239 284

Net fixed assets 408 477 520 530 536Non-current investments - - 0 0 0

Deferred tax assets (net) 17 19 20 20 20

Long term loans and advances - 81 109 109 109

Other non-current assets - 72 17 17 17

Current assetsCash and cash equivalent 475 377 197 376 464

Debtors 192 299 365 412 462

Current investments 21 23 235 237 280

Loans and advances - 48 51 51 51

Others 142 57 64 73 82

Total current assets 830 804 912 1,149 1,339Trade payables - 54 53 63 71

Other current liabilities 279 223 176 181 150

Short term provisions - 124 98 98 98

Total assets 977 1,052 1,252 1,484 1,702

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July 19, 2013 11

Cash flow statement (Indian GAAP, Consolidated)

Y/E December (` cr) CY2010 CY2011 CY2012 CY2013E CY2014EPre-tax profit from operations 70 240 375 436 464

Depreciation 24 25 32 40 45

Pre tax cash from operations 94 265 407 476 509

Other income/prior period ad 25 68 29 27 33

Net cash from operations 119 332 436 503 542

Tax 9 41 76 99 109

Cash profits 109 292 360 404 433

(Inc)/dec in current assets (91) (72) (289) (58) (102)

Inc/(dec) in current liabilities 8 122 (73) 15 (23)

Net trade working capital (84) 50 (362) (43) (125)

Cash flow from operating activities 26 342 (2) 362 308(Inc)/dec in fixed assets 4 (94) (75) (50) (50)

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

Inc/(dec) in other non-current liabilities - (120) 28 - -

Cash flow from investing activities (2) (213) (38) (50) (50)Inc/(dec) in debt (5) (11) - - -

Inc/(dec) in equity/premium 81 (80) 30 - -

Dividends (51) (136) (170) (133) (170)

Cash flow from financing activities 25 (227) (140) (133) (170)Cash generated/(utilized) 49 (98) (180) 179 88

Cash at start of the year 426 475 377 197 376

Cash at end of the year 475 377 197 376 464

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July 19, 2013 12

Key ratios

Y/E December CY2010 CY2011 CY2012 CY2013E CY2014EValuation ratio (x)P/E 37.1 12.0 9.8 8.8 8.3

P/CEPS 23.7 10.7 8.7 7.7 7.2

P/BVPS 3.2 3.1 2.6 2.2 1.9

Dividend yield (%) 1.4 3.2 4.7 3.7 4.7

EV/Sales 2.5 1.9 1.5 1.2 1.1

EV/EBITDA 28.4 10.4 7.2 5.8 5.2

EV/Total assets 2.7 2.6 2.3 1.9 1.6

Per share data (`)EPS 2.9 8.9 10.9 12.1 12.9

Cash EPS 4.5 10.0 12.3 13.8 14.8

Dividend 1.5 3.4 5.0 3.9 5.0

Book value 33.0 34.7 41.2 49.1 56.6

DuPont analysisTax 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 1.5

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

Operating ROE 8.8 26.3 27.2 25.4 23.5

Return ratios (%)RoCE (pre-tax) 7.1 22.8 30.0 29.4 27.3

Angel RoIC 13.9 35.5 35.6 39.3 37.5RoE 11.2 26.3 27.2 25.4 23.5

Turnover ratios(x)Asset turnover (fixed assets) 2.6 3.0 3.7 4.2 4.6

Debtor days 66 75 68 68 68

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J l 19 2013 13

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

DISCLAIMER

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Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise fromor in connection with the use of this information.Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to thelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates mayhave investment positions in the stocks recommended in this report.

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

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

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

hexaware, 2q cy 2013

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