Management Speak: Hexaware Technologies (Underperformer) - Strategy to improve growth engine

We attended the analyst meet of Hexaware wherein management unveiled the new growth strategy. The company showcased strong leadership team built over the last few years along with new road-map to navigate through growth air-pockets. The company has delivered stronger growth than peers, but we believe the new three-prong strategy (i) sustain performance, (ii) fix problem pockets, (iii)  create new growth engine – require strong investments and can erode margin.

Sustain performance – ‘Shrink IT and Grow Digital’: The management reiterated their strategy to win market share using automation and technology that will disrupt the legacy business (like Gen 3 wave in IMS/Cloud to disrupt RIMS). The company continues to focus on clients that are not well guarded by peers. However, the savings in ‘shrink IT’ is likely to be passed on to the clients, while retaining the operating margin at current level. Moreover, the company continues to invest in digital to help client reimage, redefine and transform their businesses to create new sources of value.

Create new growth engine: The management wants to set-up two service lines each year that can grow ~40% yoy. The company has already initiated new offerings like Professional Services (strike a balance between operational optimization and digital transformation) and Enterprise Services (help achieving business outcomes) – for CY17. The company is investing (hiring new teams and building new solutions) in new initiatives to enable it to become growth engine.

Inorganic strategy: Leveraging balance sheet: The company unveiled their inorganic strategy. Management is keen to acquire companies in US$10-25m size with capabilities in next-gen platform, technology, solution. They will leverage balance sheet or dilute equity to acquire companies. Nevertheless, the board is unlikely to change dividend policy.

Valuations & view

Management initiatives have improved deal win and revenue momentum helping them deliver growth stronger than peers. We believe investment in ‘shrink IT’ resonated well with customers. However, the growth outlook in the near terms has hit an air pocket that is likely to be resolved through new growth engine in near term. We expect earnings momentum to taper as management gears up for investments in next areas, which is further compounded by challenges with top clients. Retain Underperformer with a target price of Rs230 (14x CY18E EPS).