MOSL: HEXAWARE TECHNOLOGIES (Neutral)- Impressive margin execution despite client issues

​Hexaware Technologies:Impressive margin execution despite client issues; But the pain isn’t over yet

(HEXW IN, Mkt Cap USD1.3b, CMP INR280, TP INR270, 4% Downside, Neutral)

• Strong underlying momentum…: HEXW’s revenue growth of 0.9% QoQ was in line with our estimate, which had baked in ramp-down of two of its top customers. Growth in the underlying business, however, continued to exhibit strength, and is validated from 5.8% QoQ growth excluding the top five customers. IMS and BPO remained stars among services, together contributing 40% of incremental growth in the year so far.
  
• …further cemented by deal wins: Deal wins of USD43m from new customers take the 9MCY17 TCV to USD108m, 10% higher YoY. Led by current momentum, the company expressed the likelihood of meeting the top end of its 14-15% revenue guidance for CY17, implying ~1.3% decline in 4Q revenue, which would be driven by seasonal weakness and the residual impact of one of the client ramp-down.
  
• Commendable performance on margins: Absence of visa expenses, a reduction of ESOP charges and cost optimization led to a 90bp beat on EBITDA margin (+120bp QoQ to 17.5%). The margin beat and lower-than-expected ETR (because of one-offs) resulted in PAT of 1.42b (expectation of INR1.26b). Led by the margin beat this quarter, the EBITDA growth guidance was raised to 16.5-17.5% (from 14-15% earlier). This, in our view, assuming revenue growth of 15% would imply 160-210bp margin contraction for 4Q given pressures of seasonality and further ramp-downs. Note, the EBITDA guidance given by the company is in USD terms.