* Hexaware Technologies reported revenue at US$154mn (+0.9% qoq, +13.9% yoy), ahead of our expectations. A 4.8% qoq decline in top 5 client revenue was largely on expected lines due to client-specific headwinds while revenue performance across top 5-20 clients was strong.
* EBIT margin at 15.8% was up 110bps qoq and was better than both our as well as street estimates despite partial impact of wage revision and reflected benefits from growth leverage.
* Company reaffirmed its US$ revenue guidance of 14-15% yoy growth (expects to close CY17 towards upper end of guided range), and increased operating profit growth guidance to 16.5%-17.5% yoy V/s earlier indication of growth similar to revenue growth.
* We revise CY18/19E EPS by c.3.5% each on Sept’17 quarter beat. Valuation at 15.1x/13.7x CY18/19 P/E is fair and factors in company’s strong operating performance. Reiterate REDUCE with revised TP of Rs260 (based on 13x CY19 EPS).
Operating performance surprises positively
Hexaware’s Sept’17 quarter results were strong, with a 0.9% qoq US$ revenue growth (despite client specific headwinds) and 110bps qoq OPM improvement, ahead of both street/our estimates. EBIT margin at 15.8% was up 110bps qoq and was better than estimates despite partial impact of wage revision and reflected potential benefits from growth leverage. Reported profit at Rs1,423mn (16.2% qoq, 24.4% yoy) was aided by strong operating performance and lower tax rate Among the services lines, IMS continued to lead with 3.7% qoq growth followed by BPO with 2.3% qoq growth. US$ revenue from the US declined by 1.2% qoq (impacted by client specific headwinds) while US$ revenue from APAC and Europe increased by 21.1%/1.8% qoq. US$ revenue from top 5/10 clients declined by 4.8%/2.1% qoq while revenue from non-top 10 clients increased by 4.9% qoq.
Revise CY18/19E EPS by 3.5% each; retain REDUCE on full valuation
We revise CY18/19E EPS by c.3.5% each as we accommodate Sept’17 quarter operating performance. While we acknowledge the company’s differentiated growth in IMS (6 quarter CQGR of 11.5%) and BPO (6 quarter CQGR of 5.9%), services backed by ‘Shrink IT and Grow Digital’ strategy, valuation at 15.1x/13.7x CY18/19 P/E are full and factor in the company’s strong operating performance. We reiterate REDUCE with revised TP of Rs260 (based on 13x CY19 EPS) V/s Rs250 earlier.
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