Buy Hexaware Technologies; target of Rs 445: HDFC Securities

HDFC Securities' research report on Hexaware Technologies

Hexaware posted revenue of USD 211mn, +12.3/24.4% QoQ/YoY CC and included Mobiquity full-qtr consolidation (9% QoQ est). Revenue growth guidance was lowered to 17-18% (USD terms) for CY19 (vs. 19% earlier), implying 4Q growth of 1.6-4.8% QoQ. Decline in large BFS account (within top-3 and impact from budget cut/in-sourcing) continued and impacted 3Q growth by -200bps QoQ. Guidance cut factors continued decline in the large BFS account, 4Q furloughs and softness in BFS vertical (including Mobiquity). Net-New deal wins were soft with TCV at USD 28mn, vs. USD 36mn in 2Q however management commentary of steady renewals. While large BFS account concerns persist, reduction in client concentration (T10 concentration reduced from 56.5% to 44.4% in 2 yrs) is a positivesupported by Mobiquity. >USD 10mn client bucket has expanded to 13 accounts (vs. 9 in 1QCY19) supported by Mobiquity. EBITDA margin stood at 16.1%, +116bps QoQ and -10bps QoQ (adj. for transaction cost in 2Q). Margin was impacted by wage increase (-50bps), utilisation dip (-90bps) and Mobiquity-led higher SG&A (-140bps) which was offset by absence of visa cost (+70bps) and higher realisation (+70bps). APAT came at Rs 1.84bn, 6.7% YoY.

Outlook

We maintain BUY on Hexaware post its better operating performance (vs. est) in 3Q. Revenue cut (~3%) factoring slower organic growth (Mobiquity to support growth) is offset by margin increase. Our TP of Rs 445, valued at 16x Sep-21E EPS.