Hexaware reported a softer-than-expected quarter on all key parameters of revenue growth, margins and deal intake. Margin execution and guide was especially disappointing. The EBITDA margin pre-ESOP costs declined by 160 bps Q-o-Q with EBITDA margin guidance (post-ESOP cost) for CY20 of 15-16% being underwhelming given the benefit expected from shift to IndAS-116 (even if modest).
Though the organic revenue growth in the range of 10-12% is in line with our expectation, growth is expected to pick up from Q2CY20 given the usual weak seasonality of the March quarter. Given persistent revenue disappointments in CY19 and modest NN deal execution in Q4, confidence in guidance will be understandably low right now.
We maintain ‘BUY’ rating though as Hexaware remains a prime play on the theme of cloud native application development with valuation also being reasonable at 15.3x Mar’21E EPS.
Revenue in Q4CY19 increased by 1.3% Q-o-Q in CC and 1.8% in dollar terms to $214.3 m, modestly shy of our estimate of $215.3 m. Key headwinds were furloughs and lower number of working days being a drag of 3.4%
Q-o-Q this time vs being a drag of only 1.6% in Q4CY18, and sharper than expected decline at the secondary mortgage client facing spend challenges.
Revenues in CY20 are expected to increase in the range of 15-17% on a reported basis in dollar terms and 10-12% on an organic basis by our estimates.
EBITDA margin pre-ESOP cost declined by 160 bps Q-o-Q to 14.9% in Q4CY19 with extended furloughs and lower number of working days being a drag of 90bps QoQ and wage hikes being a drag of 60bps.