Q2CY18 RESULT UPDATE RETAIL EQUITY RESEARCH Hexaware Technologies Ltd IT BSE CODE: 532129 NSE CODE: HEXAWARE Bloomberg CODE: HEXW:IN SENSEX: 36,842 SELL Rating as per Midcap 12months investment period CMP Rs. 447 TARGET Rs. 418 RETURN (7%) 21 st September 2018 Unfavourable risk-reward Hexaware Technologies (Hexaware) is a global provider of IT, Business Process Services (BPS) and consulting services to various industries viz; Banking & Financial Services (BFS), Healthcare & Insurance, Travel & Transportation and Manufacturing. Driven by healthy 4.9% growth in volumes and strong growth in top-5 accounts, Hexaware posted 4.7% QoQ growth in consolidated revenue in CC terms in Q2CY18. Notwithstanding revenue and currency tailwinds, EBIT margin came in at disappointing 14% down by 10bps QoQ mainly impacted by lower utilisation and higher visa cost. Management raised its CY18 revenue and EPS growth guidance to 12-13% and 13-14%, respectively from 10-12% guidance earlier citing strong momentum in deal wins and robust outlook for H2CY18. We factor revenue CAGR of 17% over CY17-19E owing to strong momentum in deal wins and sustained traction in IMS and BPS services led by automation. Considering tepid margin profile in H1CY18 and impending wage hike in Q3CY18, we factor 50bps YoY decline in EBITDA margin to 15.9% in CY18E before scaling back to 16.5% in CY19E. However, we retain SELL rating on the stock, given its expensive valuation at 22.5x/19.3x CY18E/19E EPS making the risk reward unfavourable. Our revised TP stands at Rs. 418 based on 18x CY19E EPS. Volume led growth Hexaware posted 8.4% QoQ growth in its consolidated revenue in INR terms in Q2CY18 (4.7% QoQ in CC terms; 3.8% QoQ in USD terms) largely powered by solid 4.9% growth in volumes and strong growth in top-5 accounts (5.65% QoQ). Further the growth was broadbased across geographies, verticals and service lines. Geographically, the growth was led by Americas (6.2% QoQ) followed by Europe (5.4%). Amongst verticals Manufacturing & Consumer led growth with 11.2% QoQ followed by Healthcare & Insurance (10.9%) and Professional Services (9.2%). However, travel & transportation vertical bucked the trend with a decline of 12.1% QoQ mainly impacted by conclusion of a large cloud migration project. Lower utilisation and higher visa cost weighed on margin Despite robust growth in revenue, EBIT margin declined by ~10bps QoQ to 14% as the benefit of solid volume growth and forex gain (52bps) was offset by sharp drop in utilisation (74bps) and visas cost (51bps). Utilization rate during the quarter declined by 310bps QoQ to 78.2% due to sharp uptick in hiring. Net headcount addition for the quarter stood at 738 (largely freshers). However, PAT grew by 14% QoQ aided by higher other income led by forex gains. Given the company s continued focus on investment towards capability building to pursue growth coupled with tepid margin profile in H1CY18 and impending wage hike in Q3CY18, we factor 50bps YoY decline in EBITDA margin to 15.9% in CY18E. However, we expect the margin to scale back to 16.5% in CY19E given multiple tailwinds viz; scope for improving off-shore revenue mix and operating leverage. Upgrade revenue guidance on strong deal pipeline Order intake during the quarter continued to stay robust as the company bagged net new deals of TCV worth USD 41 mn from new clients (USD 28mn in Q1CY18) and USD 100 mn each from two of its existing clients. Given strong momentum in deal wins, management expects robust growth in H2CY18. Resultantly, it has raised its revenue and EPS growth guidance to 12-13% and 13-14%, respectively for CY18 from 10-12% guidance earlier. We factor revenue CAGR of 17% over CY17-19E owing to strong momentum in deal wins and sustained traction in IMS and BPS services led by automation. Outlook & Valuation: We increase our revenue estimate for CY18E to reflect the increase in guidance and reset of currency assumption. We believe the stock is already factoring in most of the positives given its expensive valuation at 22.5x/19.3x CY18E/19E EPS making the risk reward unfavourable. Hence, we retain SELL rating on the stock with a revised rolled-over target price of Rs. 418 based on 18x CY19E EPS. Company Data Market Cap (Rs. cr) 13,269 Enterprise Value (Rs. cr) 12,547 Outstanding Shares (cr) 29.7 Free Float 29% Dividend Yield 1.5% 52 week high Rs. 557 52 week low Rs. 259 6m average volume (cr) 0.3 Beta 0.4 Face value Rs. 2 Shareholding % Q4CY17 Q1CY18 Q2CY18 Promoters 71.2 71.2 71.2 FII s 13.3 14.4 14.9 MFs/Insti 7.4 6.6 6.2 Public 6.7 6.5 5.9 Others 1.4 1.3 1.8 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 3% 20% 64% Absolute Sensex 4% 11% 14% Relative Return* (1%) 9% 50% *over or under performance to benchmark index Consolidated (Rs.cr) CY17 CY18E CY19E Sales 3,942 4,639 5,400 Growth (%) 11.5% 17.7% 16.4% EBITDA 655 737 891 EBITDA Margin (%) 16.6 15.9 16.5 PAT Adj 499 588 689 Growth (%) 19.1% 17.9% 17.1% Adj.EPS 16.8 19.8 23.2 Growth (%) 21.2% 17.9% 17.1% P/E 26.6 22.5 19.3 P/B 6.6 5.7 5.0 EV/EBITDA 19.4 17.1 13.8 RoE (%) 26.9 27.3 27.7 Adj. D/E 0.0 0.0 0.0
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q2CY18 Q2CY17 YoY Q1CY18 QoQ Sales 1,137 984 15.6 1,049 8.4 EBITDA 177 160 10.9 163 9.1 EBITDA Margin (%) 15.6 16.2 (65bps) 15.5 10bps Depreciation 18 16 16.2 15 20.2 EBIT 159 144 10.4 147 7.9 Interest 0 0 (82.4) 0 350.0 Other Income 33 15 122.9 20 60.8 Exceptional Items - - - - - PBT 192 159 20.8 168 14.3 Tax 38 36 5.7 34 14.4 PAT 153 122 25.3 134 14.3 MI/ Ass (0) 0 - (0) - Reported PAT 153 122 25.1 134 14.3 Adjustment - - - - - Adj PAT 153 122 25.1 134 14.3 No. of shares (cr) 29.7 29.7 0.1 29.7 0.0 EPS (Rs) 5.2 4.1 25.4 4.5 14.3 Segmental Revenue (Rs cr) Q2CY18 Q2CY17 YoY Q1CY18 QoQ Travel & Transportation 127 132 (3.8) 138 (8.2) Banking & Financial Services 487 426 14.3 458 6.4 Insurance & Healthcare 195 153 27.0 168 15.8 Professional Services 145 140 3.5 127 14.1 Mfg., Consumer & Others 183 132 38.7 158 16.1 Total 1,137 984 15.6 1,049 8.4 Source: Company, Geojit Research Change in estimates Old estimates New estimates Change % Year / Rs cr CY18E CY18E CY19E CY18E CY19E Revenue 4,309 4,639 5,400 7.7 - EBITDA 695 737 891 6.0 - Margin (%) 16.1 15.9 16.5 (20) - PAT 506 588 689 16.2 - Adj. EPS 17.1 19.8 23.2 15.8 -
Consolidated Financials Profit & Loss Account Balance Sheet Sales 3,124 3,535 3,942 4,639 5,400 % change 21.0% 13.2% 11.5% 17.7% 16.4% EBITDA 536 576 655 737 891 % change 12.2% 7.6% 13.7% 12.5% 20.9% Depreciation 48 55 63 67 73 EBIT 488 521 592 670 818 Interest 0 0 0 - - Other Income 17 39 48 66 43 PBT 505 560 640 736 862 % change 20.7% 11.1% 14.2% 14.9% 17.1% Tax 111 141 141 147 172 Tax Rate (%) 22.1% 25.2% 22.0% 20.0% 20.0% Reported PAT 393 419 499 588 689 Adj* - - - - - Adj PAT 393 419 499 588 689 % change 22.8% 6.6% 19.1% 17.9% 17.1% No. of shares (cr) 30.2 30.2 29.7 29.7 29.7 Adj EPS (Rs) 13.0 13.9 16.8 19.8 23.2 % change 22.7% 6.4% 21.2% 17.9% 17.1% DPS (Rs) 8.6 5.5 4.0 8.0 9.2 Cash 386 413 530 701 928 Accounts Receivable 441 438 536 631 734 Inventories - - - - - Other Cur. Assets 277 369 369 406 446 Investments 41 21 21 21 21 Gross Fixed Assets 661 705 773 789 919 Net Fixed Assets 361 356 376 325 382 CWIP 116 323 256 370 370 Intangible Assets 172 176 166 166 166 Def. Tax (Net) 26 38 127 127 127 Other Assets 201 205 158 158 158 Total Assets 2,021 2,338 2,539 2,905 3,332 Current Liabilities 584 623 510 573 639 Provisions - - - - - Debt Funds - - - - - Other Liabilities 3 4 21 21 21 Equity Capital 60 60 59 59 59 Reserves and Surplus 1,373 1,651 1,948 2,251 2,613 Shareholder s Fund 1,433 1,711 2,007 2,311 2,672 Total Liabilities 2,021 2,338 2,539 2,905 3,332 BVPS (Rs) 47.5 56.7 67.6 77.8 90.0 Cash flow Ratios Pre-tax profit 505 560 641 736 862 Depreciation 48 55 63 67 73 Changes in W.C (75) (20) (90) (69) (78) Others 38 22 37 (66) (43) Tax paid (122) (145) (175) (147) (172) C.F.O 393 473 476 521 641 Capital exp. (137) (222) (96) (130) (130) Change in inv. 144 20 (0) - - Other invest.cf 7 2 2 66 43 C.F - investing 14 (200) (94) (64) (87) Issue of equity 3 1 (137) 0 - Issue/repay debt - - - - - Dividends paid (317) (251) (143) (285) (328) Other finance.cf 1 1 1 - - C.F - Financing (313) (248) (279) (285) (328) Chg. in cash 94 25 104 171 227 Closing cash 386 413 530 701 928 Y.E March CY15 CY16 CY17 CY18E CY19E Profitab. & Return EBITDA margin (%) 17.2 16.3 16.6 15.9 16.5 EBIT margin (%) 15.6 14.7 15.0 14.4 15.2 Net profit mgn.(%) 12.6 11.9 12.7 12.7 12.8 ROE (%) 28.9 26.7 26.9 27.3 27.7 ROCE (%) 37.1 35.7 34.4 34.1 34.6 W.C & Liquidity Receivables (days) 51 45 50 50 50 Inventory (days) 0 0 0 0 0 Payables (days) 14 16 14 14 14 Current ratio (x) 1.9 2.0 2.8 3.0 3.3 Quick ratio (x) 1.9 2.0 2.8 3.0 3.3 Turnover &Levg. Gross asset T.O (x) 4.9 5.2 5.3 5.9 6.3 Total asset T.O (x) 1.7 1.6 1.6 1.7 1.7 Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0 Valuation ratios EV/Sales (x) 4.2 3.7 3.2 2.7 2.3 EV/EBITDA (x) 24.4 22.7 19.4 17.1 13.8 P/E (x) 34.3 32.2 26.6 22.5 19.3 P/BV (x) 9.4 7.9 6.6 5.7 5.0
Recommendation Summary (last 3 years) Dates Rating Target 2 August 2016 HOLD 218 1 March 2017 SELL 212 28 August 2017 SELL 256 21 September 2018 SELL 418 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable. Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhijit Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion. REGULATORY DISCLOSURES:
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