Outlook stays weak, reduce Hexaware Technologies: Nomura

Posted online: Saturday, May 03, 2014 at 0000 hrs
We downgrade Hexaware Technologies (Hexaware) to ‘reduce’ (earlier 'neutral') and bring our target price to R135 (from R140) as growth and margin outlook weakens. Even after an 11% fall after the results, we find Hexaware expensive at 12x FY15f EPS (versus 9x historical average) given there has been no growth in EPS over FY13-15f, and only a 7% dollar revenue CAGR on our new estimates, which is half the tier-1 IT average. This is despite building in improvements in growth/margins over Q2-Q4, in line with management indications.

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.