MOSL: HEXAWARE TECHNOLOGIES (Neutral)-Traction in organic growth moderated by client specific issues
HEXAWARE TECHNOLOGIES: Traction in organic growth moderated by client specific issues
(HEXW IN, Mkt Cap USD1.5b, CMP INR367, TP INR370, 1% Upside, Neutral)
- Operations in line with margin levers in place: 2QCY19 CC revenue grew 5.0% QoQ (13% YoY), in line with our estimate. ~2pp contribution from Mobiquitity acquisition added on to ~3% QoQ CC (12% YoY CC) organic growth. GPM increased 220bp QoQ to 32.4%, (beat of 170bp), which was led by higher realization in acquired entity, offshore mix shift and higher utilization. Adjusting for the one-time transaction cost of INR170m, EBIT margins stood at 14.6% (100bp ahead of our estimate). PAT increased 9.2% QoQ to INR1,512m, in line with our estimate. Higher depreciation during the quarter was offset by lower ETR (18% v/s expectation of 20%). ETR is expected to sustain current low levels in the future.
- Reduction in top clients revenues led by deal completion and one client ramp-down: During the quarter, revenue from top-5 clients declined 6.3% QoQ, partially due to the completion of an IMS project in the M&C vertical of a single APAC client. This led to decline in IMS revenue by 8.1% QoQ. Secondly, work in one of the largest BFS customer in the mortgage segment started to ramp down due to changed outsourcing priorities after the appointment of new CEO. HEXW expects material reduction in spends with this client over the next couple of quarters.
- Valuation view: While revenue growth was in line, we expect organic growth to taper off on account of client specific issues in the BFSI space. For the same reason, we have reduced our revenue growth estimates by 90bp/120bp for CY19/CY20. While margins should inch up in the near future, structural concerns remain amid high attrition and ever-tightening US supply. Our net income estimates are affected by moderation in revenue, slight increase in margins (in the current quarter) and reduction in ETR to 18-19% going forward. Consequently, we have increased our EPS estimate by 3.7%/2.5% for CY19/CY20. Our price target of INR370 discounts forward earnings by 15x. Maintain Neutral.
Hexaware is a global provider of IT and Process outsourcing services. Co. focuses on maximizing client returns from outsourcing and off-shoring. Co. manages IT applications in real time as well as providing high value services around packaged enterprise applications such as SAP and PeopleSoft. Co. maintains operations in business process outsourcing arena. Co.'s solutions aim to provide value by optimising cost of ownership of technology investments for customers. Co. maintains a client base comprising several Global 1000 organizations. Co.'s global operations are located in North America, Europe and Asia Pacific.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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