Sell Hexaware as revenue, margins under pressure: Espirito

Moneycontrol Bureau

"That's the way the cookie crumbles," writes Espirito Santo on Hexaware Technologies. The Portugese investment bank on Tuesday urged investors "sell" the software services provider's shares, saying it was worried about further margin pressure.

Hexaware had last week cut its fourth quarter revenue guidance to USD 92 million from USD 94.7-96.5 million, citing changes to a project plan for a customer and impact on account of hurricane Sandy, which devastated the US east coast last month. With the revision in revenue outlook and continued investments made for the medium term, there would be an impact on profit margins, it had added.

The stock, which the street was enthusiastic about not so long ago, is already down over 20 percent in last six months. It has tumbled 11 percent since the Friday's announcement and slipped a further 3.5 percent on Tuesday. Yet, Espirito feels it is not the time for "bottom fishing."

"Outside the new deals announced in Q2 and Q3 CY12, which will contribute 8% incremental growth in CY13, our concerns are more about the ability to generate growth from existing clients, rather than its ability to win new deals. We now expect Hexaware's CY13 growth to be in low double digits at best," Soumitra Chatterjee and Nitin Padmanabhan said.

Hexaware's guidance of 500-700 bps EBITDA margin decline has surprised the analysts, as they feel that for USD 4.5 million fall in revenue, absolute EBITDA should have reduced no more than USD 4.5 million (380 bps EBITDA margin cut).

"Hexaware's guidance of a 500-700 bps drop in margins in Q4 implies that a 4 percent incremental contribution to revenues was contributing to 26-35% to EBITDA, possibly implying that some upfront investments were going into this project, but even without this event, margins would have declined in Q4, a possibility which Hexaware didn't guide the market about in Q3," Chatterjee and Padmanabhan said.

The analysts say that the company's margins have fallen to mid-snigle digits twice in last six years, making it difficult for investors to take a confident long-term view on the stock.

Espirito has cut its earnings estimates on Hexaware by 8 percent for the current year and by 20 percent for 2013. It also reduced its margin estimates by 280 bps and 130 bps respectively for 2012 and 2013.

Hexaware shares were down 2.7 percent at Rs 91.50 on NSE in afternoon trade. Hexaware has a fair value of Rs 85 on the stock.

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