Accumulate Hexaware Technologies; target of Rs 140: Emkay

Emkay Global Financial Services is bullish on Hexaware Technologies and has recommended accumulate rating on the stock on with target of Rs 140 in its September 26, 2012 research report.

“Hexaware had guided for revenues of ~US$ 92.5-94 mn (1.5%-3% QoQ) for Sep’12 qtr with actual performance continuing to track in line with the initial guidance. EBITDA margins are expected to be flat QoQ despite onsite wage hikes (-100 bps QoQ impact) aided by growth leverage and absence of higher visa expenses (130 bps hit in June’12 qtr). Reported PAT is expected to decline QoQ impacted adversely by forex losses. Company’s fresher addition remains on track with the outlook indicated earlier. Hexaware remains confident of meeting it’s CY12 rev guidance of ~US$ 370 mn (+20% YoY growth) despite a ‘relatively soft’ Sep’12 qtr with implied Dec’12E QoQ growth at ~5% driven by visibility on rampups on some of the large deals signed in the recent past.”

“Hexaware’s mgmt deserves credit for driving the turnaround post the GFC with increased focus on account mining (with co having invested in dedicated account managers and solution architects) starting with top 10 clients initially and now extending it to top 30-35 clients. We highlight that top 5 clients have grown by ~26% CAGR through CY09-CY11 with % of rev from top 5 clients increasing by ~400 bps over the period (also note that company has signed 7 large deals from top 10 clients in the past 2 yrs). Hexaware continues to make investments in account management and has hired ~11 sales people in H1CY12 (CY12 plan of adding ~15 people) with co. reaping some initial success by winning 2 US$ 10 mn+ TCV deals outside of top 10 clients.”

“Hexaware along with MindTree have remained our preferred picks in the mid tier IT services space through the past 15 months. Hexaware’s focused approach has driven has driven both improvement and the much needed consistency in the financial performance through recent qtrs but we see lower probability to ‘beat’ in the near/medium term. While valuations at <11x/10x CY12/13E P/E and ~5% dividend yield reasonable and limit any case for sharp downsides, we see little upside surprises to earnings estimates for Hexaware ahead. Downgrade to accumulate with an unchanged TP of Rs 140,” says  Emkay Global Financial Services research report.

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