Our TP for HEXW is Rs 390 (14% downside), which discounts forward earnings by 17x.
HEXW’s Q1CY18 CC revenue growth of 3.3% q-o-q was in line with our expectation (+3%). Ebitda margin shrunk 40bp q-o-q to 15.5%, below our estimate of 16%. The company reinvested gross profits in S&M early in the year in anticipation of continued traction. PAT grew 11% q-o-q to Rs 1.34 bn (in-line). On a y-o-y basis, USD revenue grew by 12.1% (CC revenue 10.1%), Ebitda by 0.2% and PAT by 17.8%.
Retains guidance for now: HEXW had a strong start to the year, and reiterated benefits of seasonality that it expects to accrue in Q2/Q3CY18. The ask rate to meet the guided band stands at 2.7-3.9%, which is achievable. It expects earnings growth for the year to mirror revenue growth.
Valuation view — steep multiples drive downgrade: HEXW’s CMP discounts forward earnings by 20x. Our CY17-19 USD revenue/earnings CAGR stands at 13/ 12.6%. HEXW plans to grow revenue in ‘teens’ while retaining current profitability. If achieved, this will be a healthy performance, but, in our view, does not warrant a multiple in excess of the peer group. The company may not benefit as much as peers in the near term from a depreciating INR, given that it is heavily hedged. Management confirmed the same via its CY18 commentary of EPS growth mirroring revenue growth irrespective of currency. Dividend yield, elevated in earlier years, is now below 2% for payout of Rs 8/share in CY18.
Our TP for HEXW is Rs 390 (14% downside), which discounts forward earnings by 17x. We would ascribe a higher multiple for a much higher growth rate in revenue and earnings than current expectations. Therefore, we are downgrading our rating to Sell.