Hexaware Tech Ltd

CMP: 75 Target: 91 Industry: IT

 

Background

Hexaware is a mid-cap IT company which mainly caters to three verticals namely, BFSI, Travel & Transportation and other emerging segments. The company has been successful in growing its revenue at a pace faster than the industry growth rate. The company counts  a number of Fortune 500 companies as its clients and with its new marketing policy of bringing its services better aligned to its clients needs, it has also been successful in garnering a larger wallet share of its client’s IT budgets. A close look at the company’s growth in the last two years gives us the confidence that it has the potential to do even better in the coming quarters.

 

Key Investment Rational

n Large deals coming through: Hexaware mainly services clients on the application maintenance side and has an average of 3 year contract with them—though in the recent times they have seen an increase in their contract tenure to 5 years. The TCV (total contract value) is generally in the range of $3-10mn. Recently, Hexaware managed to clinch their biggest deal of $110mn spread over 5 years, and another deal of $60mn. We believe these large deals are an indication of the growing level of maturity and confidence that the company has started to attain. Also, since Hexaware services clients mainly on the maintenance side their revenue is ‘sticky’ in nature.

n  Improving health of Airlines manufacturing company to benefit: The company currently services 7 out of the top 10 airlines company in the world. We believe as the health of the world economy improves this segment may throw up more projects which may benefit Hexaware considering its expertise in it.

 

n Margin expansion to continue: Hexaware has been able to gradually improve its margins over the last one year. On a QoQ basis, its EBIDTA margin improved by 280bps—while on a YoY basis it improved by a whopping 610bps. The lower margin was because of the huge investment in sales that they did a year back. The investment in sales has started to bring results in the form of more volumes. The company intends to keep their SGA constant in absolute numbers for at least a couple of years as they believe that they have made the required investment in sales. Added to it, more offshoring, improved billing rates, increased in COLA (cost of living adjustment), and increased fresher intake gives the management confidence of further margin improvement.

 

 

 

Valuation & View

The company has already upped their previous US$ guidance of 27.5% YoY increase to 32% in the previous quarter. This indicates the ability of the company to do well inspite of the adverse macro environment. We believe the trend will continue so. Currently, at a CMP of Rs.75, it is trading at 6.5x its CY12E EPS of Rs.11.37 per share. Using a target multiple of 8x, we expect the company to achieve a target price of Rs.91 per share by the end of CY12E.