Our target price is based on 10x 1-year forward EPS (up to year-end March 2016) of R13.2. The 10x multiple is at the lower end of the 9-13x range we use to value Tier-2 IT companies, given muted earnings growth expectations. We prefer HCL Technologies and Tech Mahindra (both buy) available at a marginal premium to Hexaware despite better revenue/EPS growth. We remain positive on sector demand and believe the declines for Hexaware at a majority of its top-10 clients (~50% of revenue) are company-specific issues.
Hexaware's dollar revenue fell 4.3% q-o-q (versus estimates of 1.4% q-o-q growth) and ebitda margin was down 320 bps q-o-q (versus estimates of a 60 bps fall), largely driven by revenue at top-10 clients falling 9.2% q-o-q.