Hexaware Technologies (BOM:532129)

Investment arguments

Slower growth in mid-cap peer group

- Revenue growth has been slower compared to the peers during the uptrend peak of FY07. FY09 also saw good growth for other mid cap firms but Hexaware struggled due to ramp downs.

Strong hiring guidance but back ended

The company plans to add 1,000 employees at net level for CY10. For the first quarter, it has added 167 employees on a net basis. Out of the total 1,000 employees, the split between freshers and laterals with be 50:50. Net addition in Q1CY10 was largely freshers and a similar number is expected to join in the next three quarters.

Underperformance of top clients in past

Client mining opportunities exist for the company but the past performance has not been very attractive if we compare it with the rest of the mid-cap firms.

Pick up in EAS and revival in ADM services

The contribution from the Enterprise Application Services (EAS) has declined over the years but the traction is building up with the launch of PeopleSoft version 9.1. The EAS services will be driven by implementation of upgraded version 9.1 of PeopleSoft. The management has indicated deal signings for these services.

Margin profile weaker than other mid cap peers

Hexaware’s margin has been low and it is placed between the lower-end of its peer set. The margin didn’t show good improvement in FY10 despite cost-cutting efforts like salary cut and increase in utilization ===EPS CAGR to be muted due to pressure on margins and increase in taxes===

Valuations and Recommendation

–We initiate coverage on Hexaware with a ‘HOLD’ recommendation and a target price of Rs81 on the basis of 9x CY11E earnings.

Financial statement

Source: BSE website