Event update: Hexaware Technologies (Neutral) - Expects growth momentum to continue

Event – Analyst meet takeaways

• The company hopes to sustain the growth seen over the last 4 years, over the next 3-5 years, with incremental 2-3% growth coming from inorganic moves. The company posted a USD revenue CAGR of 12.5% over the last 4 years. The guidance for CY19 is 19% y-y growth (~12.3% organic).
• IMS and BPO to lead growth at ~30% CAGR. Incidentally IMS + BPO is nearly one-fourth of HEXW revenues and contributed to 62% of their incremental growth over LTM.
• Sustain strength in manufacturing & consumer and healthcare & insurance, while improving performance in areas like BFS and travel. BFS and Travel (~near half of HEXW revenues) grew at 4% and 2% y-y in 2QCY19, with BFS likely to be slow in 2H due to a large mortgage client ramp-down, it should improve in CY20E.  Complex cloud migration & orchestration, employee experience and platforms to create, run and manage apps to drive IMS, while automation will drive BPO demand.
• Three pillars for sustainable growth are 1) Culture – focused on automation first philosophy, even at the cost of cannibalizing own business 2) Strategy – Automate everything, cloudify everything and transform customer experience and 3) Strongest team among players of its size, with experience of working in large enterprises, handling scale businesses and alignment to view that HEXW is in a sweet-spot from a size perspectives to grow.
• Focus on differentiating itself through 1) partnerships - Pega/Appian (intelligent automation), Guidewire (P&C insurance) and Workday (HR SaaS) and 2) capabilities across customer experience transformation (Mobiquity), complex cloud migration and orchestration, fully integrated automation across RPA, OCR and domain specific strengths.

Valuation and View

We retain Neutral and await better entry points. Our caution stems from 1) Weak momentum in BFSI and Travel (~50% of revenues) 2) Steep asking rates (~6.5% CQGR over 3Q-4Q) to meet organic growth guidance (adjusting for mortgage client ramp-down) 3) Overhangs from possible Barings stake sale and 4) Fair valuations at ~15.7x CY20E. We look for USD revenue/EPS CAGR of 15.6 (9.7% organic)/9.2% over FY18-21E. Prefer MPHL in tier 2 IT and HCLT/INFO in tier 1 IT.