Hold Hexaware Tech; target of Rs 100: Emkay

Emkay Global Financial Services has recommended hold rating on Hexaware Tech with a target of Rs 100, in its December 07, 2012 research report.

“In a press release to stock exchanges today morning, Hexaware revised it’s CY12 revenue growth outlook to 18% (V/s 20% earlier) citing pressure at a top 10 client due to scope change in a large engagement. Co indicated that it now expects revenues in Dec’12 at US$ 92 mn (V/s earlier guidance of US$ 94.7-96.5 mn (+2-4% QoQ growth). Given loss of potential revenues, company also indicated that margins would be impacted by ~500-700 bps sequentially in Dec’12 quarter.”

“We moderate our CY12/13/14E earnings by 9/16/13% each to Rs 10.5/10.6/12.3 respectively driven by sharp cut in revenue growth assumptions (build in 18/11/13% US$ revenue growth for CY12/13/14 respectively) and lower margin estimates (we now bake in margins at 20.5%/19.5/20% V/s 22.3%/22.1/21.4% for CY12/13/14E earlier). We note that our revised revenue estimates factor in a 3.7% CQGR through CY13 now. We had downgraded Hexaware to ACCUMULATE in Sep’12 citing ‘no upside risks to earning estimates ahead’ after backing the name (along with MindTree) in the mid tier IT Services space through CY11 and H1CY12 and are negatively surprised as we(including street) cut estimates sharply.”

“Hexaware’s focused approach has delivered both improvement and the much needed consistency in financial performance along with decent cash generation/dividend payout, which had made it a creditable mid tier holding for investor portfolios. While a tough demand environment is partially to blame for revenue growth challenges/cuts, this negative announcement does dent the confidence on the company in our view. We downgrade the stock to HOLD, TP Rs 100 (V/s ACCUMULATE, TP Rs 130 earlier). Inexpensive valuations at ~10xCY13/9x CY14 P/E notwithstanding, an improvement in financial performance will be required to inspire a constructive view ahead,” says Emkay Global Financial Services research report.

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