MOSL: HEXAWARE TECHNOLOGIES (Neutral)-Double-digit growth despite client issues

Hexaware Technologies: Double-digit growth despite client issues; exhibits strong underlying momentum

(HEXW IN, Mkt Cap USD1.6b, CMP INR355, TP INR340, 4% Downside, Neutral)

•  Strong underlying momentum: Revenue growth of 1.4% QoQ was ahead of our estimate of -1%, which had baked in ramp-down of one of its top customers. Growth of 12.4% YoY, despite these headwinds, is a testimony to the underlying strength in the business – fuelled by the same bits: Europe and APAC among geographies, and ADM, BPS and IMS among services.
• Conservative guidance: Despite the residual impact of ramp-downs (spread equally over CY17 and CY18), HEXW guided for 10-12% revenue growth for CY18 – compared to 15.7% delivered in CY17. This implies a CQGR of 3% in CY18, the same that was delivered in the previous year, despite a neat uptick in deal wins from new customers at USD72m, breaking the average of ~USD40m per quarter and taking the total for the year to USD180m (+19% YoY). Comments around the guidance indicated conservatism – to avoid a downward revision in the future. We are baking in 12.5% revenue growth, a notch higher than indicated.
• Margins to remain steady: Pressure from customer ramp-downs, wage hikes and transition costs in new deals resulted in a 160bp contraction in EBITDA margin, a miss of 60bp. PAT at INR1.2b was above expectations by 5%, led by the strong beat on revenue growth. HEXW guided for margin stability, led by the offsetting of headwinds (currency, wage hikes and transition costs) by continued momentum in revenue growth, operating leverage and pyramid rationalization.