The Hindu Business Line : Hexaware Technologies: Hold

SHAREHOLDERS may retain their exposure in Hexaware Technologies at current price levels, though the stock surged by 30 per cent in the last ten days since the announcement of the earnings performance. Considering the sharp run-up in the stock price, however, fresh exposure may be avoided. And, at this stage, the stock is appropriate only for investors with a penchant for risk. The Hexaware board is to meet on February 21 to consider a stock-split.

Going by the earnings guidance, based on calendar year 2005 estimated per share earnings, the stock trades at a price-earnings multiple of 14 times.

The upside for Hexaware continues to rest on in its business model which is focussed on the "under-served" markets such as the airline sector, clients based in Germany, and PeopleSoft suite (being expanded to SAP and Oracle). This focus has paid off, with Hexaware recording double-digit growth in revenues (in dollar terms) for the seventh consecutive quarter.

It has also added nearly $61 million in new business in the second half of FY-05. This robust client addition is expected to scale-up sharply as only 15 of its 35 Global 500 clients have contributed to the revenues in excess of $1 million.

The guidance projecting a 40 per cent rise in topline and an 80 per cent jump in the bottomline also suggests that increased offshore volumes, improved employee utilisation and well-controlled selling, general and administrative expenses will trigger margin growth at both the operating and net profit levels.

An uncertain variable, however, continues to be the fallout of the Oracle-PeopleSoft merger. Not only does Hexaware derive one-third of its revenues from PeopleSoft practice, it is also the largest provider of offshore services in India and among the top five global vendors for PeopleSoft suite of products.

It derives revenues from PeopleSoft practice in two ways, as a partner and competitor. About 20 per cent of Hexaware's revenues are derived from maintenance of PeopleSoft's suite at client locations. Since there is an assurance from Oracle that it will continue to maintain PeopleSoft products till 2013, Hexaware's revenue stream may not be at risk in the near term.

About 14 per cent of the revenues came from an India Solutions Centre (ISC) for PeopleSoft, set up under the BOT model by Hexaware in 2003. Since this arm undertakes product development, implementation, consulting and maintenance services for PeopleSoft products, this revenue stream may be at risk.

The Hexaware management has indicated that for the guidance, the revenues from the ISC have been taken only for the minimum contracted period. Decisions on this front are expected to be taken by March. To diversify risks emerging from this development, Hexaware has already moved into SAP and also plans to offer services in Oracle.

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