Hold Hexaware Technologies; target of Rs 347: Prabhudas Lilladher

Prabhudas Lilladher's research report on Hexaware Technologies

Hexaware 2QCY19 results were broadly inline with our estimates, with beat on margins. Hexaware has given revenue guidance of 19% for CY19E (earlier:20%), trimmed as they are facing headwinds from client specific issues in BFSI vertical. Hexaware delivered better EBIT margins of 14.6% (vs Ple: 13.5%, Cons: 13.7%) due to better onsite-offshore mix, higher billing rates & improved utilization. Hexaware expects EBIT margins to improve in CY2019, an aggressive assumption against the backdrop of high industry attrition and talent shortage in the US. Hexaware management mentioned BFSI vertical will continue to face headwinds in CY19E. Gross margin
improved in this quarter to 32.7% from 30.5% in Q1CY19, rising proportion of offshore mix & better utilization helped in improvement. We believe key negative for Hexaware is softness in BFS (41% of revenue) mainly focused in capital markets & buy side for new deals which have longer sales cycles. We remain watchful on expanded attrition levels of 18% (6-year high) along with supply side constraints. Led by revision of ETR at 18.5% for CY19E (earlier 20%), marginally raised our EPS estimates by ~2% to Rs20.9/24.8 for CY19/20E. We expect revenue & EPS CAGR of 18.2% & 13.2% respectively over CY18-20E.

Outlook

We value Hexaware at 14x CY20E EPS with changed target price of Rs347 (earlier Rs339). Stock is currently trading at 17.7x CY19E & 15x CY20E. Maintain Hold.