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Hexaware Technologies (HEXWIN) Summary

Core Content and Key Information

Hexaware Technologies (HEXWIN) is a leading IT, BPS, and consulting services provider, focusing on the Banking, Capital Markets, Healthcare, Insurance, and Transport sectors. The company's share price has declined by 12% over the last two weeks due to market weakness and the underperformance of mid/small-cap stocks. However, the report suggests that the fundamentals of the IT sector and HEXW are improving, leading to an upgrade from HOLD to BUY. This upgrade is based on the anticipation of potential large contract wins and the expected acceleration in revenue and EPS growth.

Main Points and Viewpoints

Revenue Growth and Momentum

• Revenue Growth: HEXW experienced strong revenue growth in FY17, driven by client additions, increased order booking, and a higher revenue market share.
• Contract Value: The company secured two contracts worth over USD100 million each from existing clients in 2Q, compared to an average of USD5-25 million in the previous 2-3 years.
• Revenue Forecast: The report forecasts a USD revenue CAGR of 14.8% for FY18-20E, attributed to the acquisition of new clients and cross-selling to existing ones.
• Quarterly Growth: The company is expected to see a strong revenue growth of 4.6% QoQ in constant currency and 3.8% QoQ in USD for 3Q18, with an 8.6% increase in INR terms.
• Annual Growth: FY18 revenue is expected to grow by 18.6% compared to FY17, with a forecast of 13.8% for FY19E and 14.6% for FY20E.

Margin Improvement and EBITDA

• EBITDA Growth: HEXW's EBITDA is forecasted to grow at a CAGR of 17.3% for FY18-20E, with a projected increase in EBITDA margin to 18.4% in FY19E and 18.3% in FY20E.
• EBITDA Margin: The EBITDA margin is expected to improve by 16.7% in 3Q18, and the EBIT margin is forecasted to increase by 120 basis points to 15.2%.
• Margin Drivers: The improvement in EBIT margins is attributed to INR depreciation, better employee utilisation, and a flattening of the employee pyramid.

EPS Growth and Valuation

• EPS Growth: The company's EPS is forecasted to grow at a CAGR of 21% for FY18-20E, driven by strong revenue growth, INR depreciation, and steady margin improvement.
• Valuation: The core P/E ratio is currently at 15.6x for FY19E, a 15% premium to its 5-year average of 15.6x. The price target for the next 12 months is INR 470, which is 15% above the current price of INR 409.
• Net Dividend Yield: The net dividend yield is expected to increase from 1.2% in FY17 to 2.8% in FY20E, with high pay-outs of 37-39% forecasted for FY18-20.

Financial Metrics

Metric	FY16A	FY17A	FY18E	FY19E	FY20E
Revenue (INR m)	35,349	39,420	46,747	56,950	65,279
EBITDA (INR m)	5,753	6,553	7,689	10,507	11,919
Core Net Profit (INR m)	4,177	4,996	6,000	7,779	8,851
Core EPS (INR)	14	17	20	26	30
Core EPS Growth (%)	6.1	21.7	20.1	29.7	13.8
Net DPS (INR)	5	4	8	10	11
Core P/E (x)	15.0	20.2	20.2	15.6	13.7
P/BV (x)	3.7	5.0	5.2	4.4	3.7
Net Dividend Yield (%)	2.7	1.2	2.0	2.4	2.8
ROAE (%)	26.6	26.9	27.7	30.7	29.6
ROAA (%)	19.2	20.5	22.0	24.6	24.0
EV/EBITDA (x)	10.1	14.6	14.9	10.6	9.1
Net Gearing (%) (incl perps)	net cash	net cash	net cash	net cash	net cash
Consensus Net Profit (INR m)	-	-	5,884	6,727	7,673
MKE vs. Consensus (%)	-	-	2.0	15.6	15.4

Key Risks

• Client Concentration: HEXW faces the risk of over-reliance on a few major clients.
• Visa Rules: Changes in visa regulations could impact the company's operations.
• Execution Risk: There is a risk that the company may not execute new contracts as expected.

Summary of Key Highlights

• Revenue Growth: Strong revenue momentum is expected with a forecast of 14.8% CAGR for FY18-20E.
• Margin Improvement: EBITDA margins are expected to increase due to INR depreciation and improved operational efficiencies.
• EPS Growth: EPS is forecasted to grow at a CAGR of 21% for FY18-20E.
• Valuation: The core P/E ratio is currently at 15.6x for FY19E, with a price target of INR 470 for the next 12 months.
• Dividend Yield: The net dividend yield is expected to rise to 2.8% in FY20E, indicating strong cash distribution.

Price Drivers

1. Barings' Acquisition: Barings acquired the promoter's stake and further increased it to 62%, which is a significant factor in the company's growth.
2. Leadership Change: The appointment of R. Srikrishna as CEO has contributed to the company's improved performance.
3. Share Buyback: The company has announced a share buyback, which is a positive signal for investors.
4. Guidance Increase: The company raised its FY17 revenue and earnings guidance, indicating confidence in future performance.

Swing Factors

• Upside: HEXW is expected to have consistent revenue growth above the industry average and secure at least one large deal worth USD25 million per quarter.
• Downside: The company may face challenges if it fails to secure new clients or experiences a loss of top clients, which could impact its revenue and margins.

Conclusion

Hexaware Technologies is showing strong fundamentals and growth potential, supported by the company's strategic moves and improved financial metrics. The upgrade to BUY reflects confidence in the company's ability to secure large contracts and achieve higher revenue and EPS growth. However, investors should be aware of the risks associated with client concentration, changes in visa rules, and execution challenges. The company's financial performance and valuation suggest a positive outlook for the next 12 months, with a price target of INR 470.