Buy Hexaware; target of Rs 100: Emkay

“Hexaware stock has corrected by ~33% in the past 3/6 months after a ‘relatively soft Se’12 qtr performance and the cut in revenue guidance in early Dec’12 month (on account of scope change in a large engagement with one of the top 5 clients). Hexaware had emerged as a creditable mid tier IT holding for investor portfolio’s by way of a strong financial performance through most of CY11-H1CY12, which stood dented with the cut in CY12 revenue guidance in early Dec’12. While several quarters of improved financial performance would be required to undo the damage on that count, we find valuations reasonably attractive (we build in possible scenarios of 5/10/15/20% US$ revenue growth with EBITDA margins at 16-20% range which leads to possible CY13E earnings in the range of Rs 8.1-11.7) at ~8x CY13E P/E and ~5% dividend yield.”

“Hexaware’s strong performance through CY11 and most of CY12 was driven both by (1) strong revenue growth (bolstered by ramp ups on the large deals won at top clients) and (2) improvement in margins (which was aided by growth leverage, increased offshore proportion of revenues and broadening of employee pyramid/freshers additions). We see an improvement in revenue growth by H2CY13 with revenue growth led largely by financial services (expected to grow higher than co average) and a possible uptick in EAS business post the Peoplesoft 9.2 release in H1CY13. While Hexaware’s margins will fall sharply in Dec’12 qtr (co will report results on Feb 11’2013) by ~500-700 bps (we estimate a 690 bps sequential decline for Dec’12 qtr), margins will improve through CY13 as revenue growth recovers.”

“We have moderated our CY13/14E earnings by ~10%/6% each to Rs 9.6/11.6 respectively building in caution in our revenue/margin assumptions (we forecast a 9/11% US$ revenue growth for CY13/14 no V/s 11/13% earlier with revised CY13/14 EBITDA margins at 17.7/19.5%, V/s 19.7/20% earlier). We continue to back upside risks to our revised estimates with valuations at <8x/7x CY13/14E P/E and ~5% dividend yield driving confidence in our ratings upgrade. Upgrade to buy with an unchanged TP of Rs 100 (V/s hold earlier),” says Emkay Global Financial Services research report.

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