Stock Fundamentals

Hexaware Technologies: Interim risks, good long-term durable prospects

Vivek Ananth | Updated on November 10, 2019 Published on November 10, 2019

Investors may wait for temporary headwinds to play out before taking fresh positions

Hexaware Technologies, a mid-tier IT services firm, has been posting industry-leading revenue growth over the past 3-4 years. In the latest September quarter, however, the company’s revenue growth slowed and hence the management lowered the growth guidance for 2019 (the company follows calendar year as its accounting period) to 17-18 per cent from 19 per cent given earlier. It had reiterated its guidance only a month before the quarterly results were announced.

Hexaware’s stock has fallen by over 10 per cent since the results were declared. With this fall, Hexaware is trading at a trailing 12-month price-to-earnings multiple of 17 compared with its three-year average of 18.7. It is cheaper than its mid-tier IT services peers such as L&T Infotech and Mindtree.

While the firm’s long-term prospects appear sound, a few client-specific issues and expected margin pressure will weigh on the stock in the near term. Hence, investors can hold the stock and wait for interim risks to play out before taking fresh positions.

Slowing growth

Hexaware’s revenues in constant currency terms stood at $211.7 million in the latest September quarter, a growth of 12.3 per cent q-o-q (versus 13 per cent in the June quarter)

 

The slowing growth is largely due to one large client in the banking and financial services (BFSI) space cutting spends. The impact of this will continue in the ensuing December quarter. This is broadly in line with the pressure witnessed by most players in the IT space owing to lower client spends in the BFSI space.

Barring this one client, Hexaware’s revenue growth has been steady.

Apart from BFSI, which makes up nearly 39 per cent of Hexaware’s revenues, the company has seen double-digit growth in other verticals — manufacturing and consumer, healthcare and insurance, etc. So, even though a part of an engine of growth (BFSI) is witnessing some weakness, the rest of the verticals appear to be firing on all cylinders.

In the September quarter, Hexaware’s revenues from its top 10 customers were 44.4 per cent of total revenues. While the concentration risk is high, the company has been reducing the share of top clients over the past year, which is a positive. During the same period last year, top 10 clients contributed 52.2 per cent of the revenue. The top five customers’ revenue contribution has also come down to 35.2 per cent from 42.1 per cent last year. This has been helped by the acquisition of Mobiquity which the company completed in the September 2019 quarter.

Mobiquity has given Hexaware an entry into the core banking space and allowed it to cross-sell its other mobile app-building offerings. It has already bagged a few deals by cross-selling in the September quarter. The subsidiary has presence in the US and Europe and will help Hexaware expand its presence in these geographies further.

However, the broader slowdown in spending in the BFSI space would also impact Mobiquity.

Financials

The company posted a consolidated net profit of ₹183.7 crore in the September quarter, rising 21.3 per cent over the previous quarter, while revenues grew 13.2 per cent to ₹1,481.3 crore. In the past three years till 2018, Hexaware’s profitgrew 14.1 per cent (CAGR), while revenues grew 14.2 per cent.

 

On the margin front, there has been an impact of salary hikes in the September quarter; the company expects some of the impact of this to continue in the December quarter as well. There was also a foreign currency impact on its margins. EBIT margins came in at 13.9 per cent during the September quarter compared with 14.6 per cent in the previous quarter.

The company has managed to arrest the rising attrition (which was at 18.2 per cent levels in the last two quarters) to 17.3 per cent on an LTM basis. Attrition has been increasing over the past year, and the company has managed to stabilise it. At the same time, in the September quarter, the utilisation of employees dipped to 79 per cent as it hired more people ahead of new projects.

Published on November 10, 2019
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