Hold Hexaware Tech; target of Rs 107: Asit C. Mehta

Asit C. Mehta has recommended hold rating on Hexaware Technologies with a target of Rs 107, in its December 7, 2012 research report.
 
“Hexaware Technologies Ltd. (Hexaware) revised their revenue growth guidance. The revenue growth rate (in $ terms) has been revised downwards to 18% from the earlier estimate of 20% YoY.”
 
“The downward revision is entirely based on unanticipated changes made by one of the top clients. These changes relate to the project delivery method, scope and timeline. The client does not seem to have any issues with Hexaware’s deliverables quality and governance. Hexaware’s management now expects Q4CY12E revenues to be at $92 mn. Previously, the company had projected revenues in the range of $94 - $96 mn for the said quarter. For the current year, the guidance implies revenues of $364.1 mn, against the earlier expectation of $366 - $368 mn for CY12E. The impact on revenues is likely to be one-time and will be reflected in Q4FY12E. The management is unsure whether the revenues from this client will be accounted from early 2013 onwards, as the timeline of the project execution has changed. The impact on operating margins is expected to be in the range of 500 – 700 bps QoQ for Q4CY12. This implies that operating margins will be reported in the range 14.5% - 16.5%. The company has already incurred significant costs in terms of manpower, software and transition expenses during the implementation of this large and complex engagement. The company has not accounted for any revenues against these costs, thereby pressurizing the operating margins.”
 
“At the CMP of `97, Hexaware trades at 8.8x the CY12E EPS of `10.9 and 10.1x the CY13E EPS of `9.6. The circumstances make a strong case of paring our estimates downwards for CY12E and CY13E as the revenue and margin hit is significant and the revival process could take at least three more quarters (including Q4CY12E) in our opinion as the company hopes to re-coup the damage only through increasing volumes. We value the company at 10x the FY13E EPS and reduce our target price to `96, thereby recommending investors to HOLD the stock, as against our previous recommendation of accumulating the stock,” says Asit C. Mehta research report.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More