Hexaware Technologies: Promising clicks - Buy

Many mid-tier IT companies have had a fabulous run in the markets over the past one year or so.

Thanks to a revival in key segments, improving client spends and a weak rupee, most of these stocks rallied, and doubled or even tripled in value in just 12-18 months.

Even so, the correction in the broader markets over the past few months has resulted in a few quality names becoming attractive from a valuation perspective after steep falls in share prices.

Hexaware Technologies is one such solid mid-tier IT player whose stock price has corrected — in the recent market volatility — by more than 24 per cent from its peak, presenting an attractive buying opportunity for long-term investors.

Healthy client additions, solid traction in the key BFS (banking and financial services) vertical and an ability to drive automation across its service lines are positives for Hexaware. The company has also been able to mine existing clients well to win large long-term deals, which increases its revenue visibility.

At ₹378, the stock discounts its likely CY20 per-share earnings by less than 16 times, lower than the valuation multiples that shares of peers such as NIIT Technologies and Mindtree trade at (17-19 times), making it a reasonably attractive option for investors with a two-year horizon.

In CY17, Hexaware’s revenues rose 11.5 per cent over the previous fiscal to ₹3,942 crore, while net profits increased 14.3 per cent to ₹641 crore. In dollar terms, the revenue growth figure was healthier, at 15.6 per cent, which is among the best in the IT industry.

The growth momentum has continued in the first half of CY18, with revenues rising 12.4 per cent over the same period in CY17 and net profits increasing 21.8 per cent. The company has guided for 12-13 per cent revenue growth in CY18, indicating a fairly healthy outlook.

Key segments deliver

Hexaware’s largest vertical — BFS — which accounts for around 43 per cent of its revenues, has continued to witness robust traction and been able to grow at or faster than the overall company’s revenue rate over the years. Other large segments such as healthcare, and manufacturing and consumer, too, have grown at a healthy clip. Thus, Hexaware’s growth has been reasonably broad-based.

One of the key aspects of Hexaware’s go-to-market strategy has been its ability to bring in automation, cloud and digitisation in most of its service offerings. Thus, the company has been able to tap into the sweet spots of client spends even in routine application-related deals, as there is increasing demand from customers across the board for automation of tasks.

Application development and maintenance, business process services, and digital assurance(software testing), which together generate over 62 per cent of the company’s revenues, are being driven mostly by Hexaware’s automation offering.

Healthy client mining

The company has been able to constantly mine its existing clients well and win larger deals from them. During the June quarter, Hexaware managed to get a thumbs-up from existing customers and won two contracts worth $100 million each, to be executed over a period of five years, thus giving substantial revenue visibility for the foreseeable future.

Over the past year, Hexaware has managed to add three customers in the $10-20 million band — five each in the $5-10 million and $1-5 million bucket categories.

By striking a good balance between mining existing clients and chasing new ones, the company has maintained a healthy customer mix.

Operationally, utilisation rates, which had been in excess of 80 per cent over the past several quarters, was consciously brought down to 78 per cent levels in June. The company wants to maintain an optimal trained bench rather than go for just-in-time hiring as it chases growth and efficient project execution. Attrition has been stable at 13-14 per cent over the past year and is not a cause for concern. While rupee depreciation should be a positive for the company, any push from customers for discounts — in the light of the weak currency — could affect margins.

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