Hexaware In Line With Estimates, Outlook Positive

Hexaware Technologies announced results for the quarter ending June 2012 (Q2) on July 30, 2012. The results posted are a mixed bag considering the economic outlook and the growth as compared to the guidance for 2012. We maintain a positive outlook on the scrip due to the upper edge of mid-cap IT companies over the year. As compared to the previous quarter, the revenue from operations increased by 3.65 per cent from USD 88.03 million in Q1 2012 to USD 91.24 million in Q2 2012. In rupee terms, the revenue was seen at Rs 500.1 crore in Q2 2012 as compared to Rs 438.3 crore in Q1 2012, marking a growth of 14.10 per cent. 

In terms of profit, the operating profit, profit before tax and the net profit were seen at Rs 107.1 crore, Rs 112 crore and Rs 89 crore respectively. There was a reduction in the net profit margin by 236 bps because of an increase in taxes, which was more than estimated by the company. The EBITDA and EBIT margins of the company increased by 53 bps and 63 bps respectively, reaching 22.9 per cent and 21.4 per cent. 

The revenue guidance given by the company for 2012 was for it to reach USD 370 million, which is a YoY growth of 20 per cent. For 2012, considering the Q1 revenue of USD 88.03 million, Q2 revenue of USD 91.24 million and the estimated Q3 revenue of USD 92.5 million, the company is left with a little pressure for it to achieve USD 98.23 million in revenue in Q4, demanding a 6.19 per cent sequential growth in Q4, assuming revenue for Q3 to be in line with the estimates. 

In terms of client addition, the company has added new clients in line with the previous quarters. Of the 12 clients added, three were in the banking and financial services vertical while one was in the travel and transportation vertical. The company also bagged a deal to the tune of USD 100 million, cumulative over the next four years. Revenue is expected to flow in from this deal starting Q1 2013. There were also some good numbers seen in terms of attrition rate and DSO, increasing the efficiency of Hexaware. The attrition rate for the company reduced to 9.6 per cent, which is the lowest when compared to the 12-16 per cent seen in the big four of the IT industry. The DSO reduced sequentially from 52 days to 45 days.

Hexaware’s main focus remains on banking & financial services (BFS), travel & transportation and healthcare & insurance. Due to the global situation, there has been an increase in IT spending cuts and delayed decision making as seen in the verticals of BFS and travel & transportation, thus resulting in no outstanding figures though they are in line with the expectations. In terms of geography, the company plans to focus more on the growing Asia Pacific region and increase the revenue share of this region from the recent 7.5 per cent to 10 per cent in the next 10 to 18 months.

Like other mid-cap IT companies, Hexaware too has benefited in relation to the big IT players in India. This trend in the mid-caps has been a result of the disintegration of larger deals into smaller ones and the multi-sourcing of deals. With similar trends being followed, the YTD return on the stocks of Hexaware has been 52.84 per cent. Having said this, the stock is yet trading at a trailing PE of 10.25x which makes it a good deal to invest in. Nonetheless, caution has to be maintained while investing due to the heavy capital appreciation seen over the year.