MOSL: HEXAWARE TECHNOLOGIES (Neutral)-Beat-and-raise as revenue momentum continues

​Hexaware Technologies: Beat-and-raise as revenue momentum continues

(HEXW IN, Mkt Cap USD1.2b, CMP INR262, TP INR250, 5% Downside, Neutral)

• Revenue momentum intact: HEXW continued its strong revenue momentum in 2QCY17 (USD152.6m; 2.3pp beat). In constant currency terms, revenue grew 4.9% QoQ and 18.2% YoY to USD151.8m. EBITDA margin, including ESOP charges, shrunk 70bp QoQ to 16.2%, marginally below our estimate, due to elevated ESOP charges (INR121m v/s estimate of INR54m). PAT grew 7.5% QoQ to INR1.22b (7pp beat) on the back of better-than-expected revenue, forex gains, and lower tax rates.
• Broad-based traction drives guidance raise: Broad-based growth across geographies and verticals was a highlight for the quarter, with IMS and BPS as the stars among services. After the second quarter of high-teens growth, HEXW upgraded its revenue growth guidance for CY17 to 14-15% from 10-12%. Even flat revenue sequentially for the remainder of the year will put HEXW at the higher end of the band. It expects to sustain EBITDA margins at last year's levels (16.3%).
• Alleviates concerns around top clients: Sluggish outlook for the second half is a function of weakness in two of its top five clients, ramp-down in one of which was embedded in the 10-12% guidance at the beginning of the year. The situation in new account is expected to impact HEXW's revenue by 2.5-3% in CY18 - it will still exit CY17 with close to double-digit growth. Margins in these accounts were close to company average, and should thus remain unaffected. Also, HEXW noted it lost only a share of the larger piece and continues to grow in other areas of the relationship.