Stock Fundamentals

Hexaware Technologies: Hold

K Venkatasubramanian | Updated on December 21, 2014

New push: Client wins in focus. FOTOSCOOL/SHUTTERSTOCK.COM


The company’s growth in key segments is reviving. But valuation seems a tad expensive

Investors seeking a defensive tilt to their portfolios can retain their holdings in mid-tier IT player Hexaware Technologies.

After a change in ownership in August 2013, when private equity player Barings Asia took control, the company initially experienced client-specific challenges and there was a change in senior management as well. But over the past couple of quarters, and especially in the September period, Hexaware managed to get back on the rails by delivering reasonable revenue growth.

At ₹201, the share trades at 19 times its likely per share earnings for 2014 (the company follows calendar year reporting). This is expensive, given that the Hexaware stock has been trading at much lower valuations in the past few years and faster growing peers such as Mindtree trade at similar levels.

In the first nine months of this fiscal, Hexaware’s revenue rose 11.6 per cent over the same period in 2013 to ₹1,889 crore, while net profit fell 15.6 per cent to ₹233 crore. The fall in profits was as a result of substantial increase in employee costs and other operating expenditure. These cost heads are expected to be more controlled in the future.

Client additions continue to be healthy, and key segments such as BFSI and high-margin service offerings such as business intelligence and enterprise solutions continue to grow at a fair rate.

Client wins

Hexaware witnessed its top clients reducing their revenue contribution in the fourth quarter of the last fiscal and in the March period of 2014. Much of this was due to project closures and budgetary reallocation by clients. As a result, there were sequential revenue declines. But over the last couple of quarters, there has been a revival of sorts, with the company’s top 10 customers ramping up again.

Over the last year, the company has added one customer in the $20-million category, three in the $5-10 million bucket and as many as five clients in the $1-5 million band. Clearly, with the new CEO taking charge, the focus seems to be back on mining existing clients and hunting for newer customers.

The banking and financial services vertical, Hexaware’s largest segment, has increased contribution by more than 3 percentage points over the past year and now accounts for about 39 per cent of revenue.

A couple of other verticals have been soft, though its emerging verticals have grown at a robust pace — faster than the company’s overall revenue rate. Though its key segments are firing well, the company would need to broad-base its growth.

Hexaware’s high-margin offering, which accounts for over 40 per cent of its revenue, has grown at a healthy pace in the last year, indicating that the company has been able to tap into discretionary spends. The infrastructure management services business also continues to witness robust traction. However, its application services offerings have not been able to expand significantly. As with many top-tier and even mid-sized players, Europe continues to increase contribution to revenues (28.1 per cent), while growth from the US remains a tad tepid.

Cost pressure to ease

The company has significantly increased onsite hiring over the past three-four quarters as a result of which manpower costs have gone up significantly.

Due to this, margins are a good 2-3 percentage points lower than the 20-21 per cent levels earlier. Once these projects are shifted offshore after the initial phase, the new mix should optimise costs.

Published on December 21, 2014

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