Hexaware Technologies’ (Hexaware) Q1CY17 revenue, at $144.7million, grew 4.2% q-o-q (up 4.0% CC) and surpassed Street’s 1.0% growth forecast. EBITDA margin (net of ESOP costs) fell 50bps QoQ to 16.9%, but was above Street’s 16.6% estimate. With robust Q1CY17, the CQGR for 10-12% for the company stands at meagre -0.1-1.1%, implying sufficient cushion for anticipated ramp down due to insourcing.
The company has maintained flattish margin guidance for CY17. Hexaware inked TCV of $ 25 million during Q1CY17. Dollar revenue grew 4.2% to $144.7mn on account of 4.3% volume spurt. Growth was broad based with Americas, Europe and Asia Pacific growing 3.1%, 3.4% and 19.7% q-o-q, respectively.
IMS, Digital Assurance/Testing and ADM posted robust q-o-q spurt of 21.4%, 4.1% and 3.3%, respectively. EBITDA margin fell 50bps, majorly due to currency movements, lower utilisation level of onsite employees, ramp up of new BPO clients and change in business mix. PAT declined 7.4% q-o-q to Rs 1.14 billion. Hexaware posted robust revenue growth in Q1CY17 with steady margin. 10-12% CY17 revenue growth guidance implies -0.1-1.1% CQGR for balance quarters, implying sufficient room to compensate for the anticipated 1.0-1.5% revenue impact due to insourcing. We have revised up CY17 USD revenue growth estimate by 190bps to factor in the strong Q1. With possible visa cost related headwinds and increased investments in business, we perceive limited margin levers; ergo, we expect margin to remain at the current level.
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However, we have changed dollar rate to Rs 67 from Rs 69, leading to 1.6% and 1.1% cut in CY17E and CY18E earnings, respectively. Hexaware has clocked robust growth with improved utilisation and lower attrition in Q1CY17. We estimate 11.0% dollar revenue CAGR and 8.5% earnings CAGR over CY16- 18.
We believe, current valuations, at 13.5x CY18E EPS, leave limited upside in the stock. Hence, we maintain ‘hold/SP’ with revised target price of Rs 212 (Rs 215 earlier) as we change dollar rate to Rs 67 from Rs 69 earlier.