• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Krishnan Thiagarajan

INVESTORS can consider taking exposure in the Hexaware Technologies stock, especially on declines linked to the broad market.

At the current market price, the stock trades at a stiff price-earnings multiple of 17 times its annualised January-March quarter earnings for 2004. Hexaware's fundamentals rest on a robust business model, which is reflected in a good January-March quarter performance.

Niche business model

The top management has reiterated that it will continue to work on strengthening its existing niche model, which has three important elements. The first plank of its niche strategy is to offer its software solutions in a few choice verticals: BFSI (banking, financial services and insurance) accounted for 45-50 per cent of consolidated revenues; manufacturing/enterprise solutions chipped in with 25-35 per cent; and airlines/transportation brought in12-15 per cent over the past four quarters. It has also been steadily adding clients in these verticals.

In the first quarter ended March 31, out of 91 active clients, Hexaware had increased its million-dollar client tally to 23 from 16 in the immediately preceding quarter.

The second leg of Hexaware's business model, which focusses on enterprise solutions, is slowly being integrated with the first element. The company is the largest provider of offshore services in India and the top five global vendors for Peoplesoft suite of products. To widen its portfolio of offerings, it has added SAP and business intelligence (BI) to this range. In the latest quarter, it has added one SAP client and two new BI clients.

In the light of the these two elements, Hexaware has also raised the revenue guidance for 2004 to $108 million (up from $102 million) and post-tax earnings to $11.2 million (from $10.2 million announced earlier).

As the final leg, Hexaware is among the few companies which has penetrated the German market successfully.

In the January-March quarter, the contribution from Europe rose to 27 per cent from 23 per cent on a sequential basis.

With increased focus on SAP in Germany and a near-shore centre set up at Badambor in Germany, this contribution is expected to rise further.

...but challenges remain

Despite a robust business model, Hexaware remains exposed to two key challenges:

Onsite to offshore project transition: In the latest quarter, about 39 per cent of the projects were managed offshore, up from 37 per cent in the previous quarter. While both onsite and offshore billing have remained steady, the company's operating margin at 11-12 per cent is lower than its peers. Unless the company steps up the offshore component to 45-50 per cent, the operating margins may not improve sharply. Only then will it be in a position to continue to justify the selling, general and administrative expense at about 25-27 per cent of revenues.

Step up utilisation: The utilisation levels at 69 per cent in the latest quarter is lower than its frontline and medium-sized peers. Hexaware has to manage the twin challenge of strong manpower addition over the next few quarters, along with employee attrition at 14 per cent (up from 11 per cent) to maintain/increase utilisation levels.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line