We attended Hexaware’s (HEXW) analyst day, where management shared the progress on its strategy of ‘Automate Everything – Cloudify Everything – Transform Customer Experience.’ HEXW’s recent acquisition of Mobiquity is meshing well with the current offerings of the company. Mobiquity has front-end domain expertise with offerings around strategy and experience design, while HEXW is strong in engineering and execution. This is creating ample opportunities for both the entities to pitch full stack experience to their respective client groups. Mobiquity has strong vendor and client relationships with AWS and Backbase, which is creating opportunities for HEXW in IMS and retail banking, respectively.

BFS vertical (40% of total revenues) is highly skewed toward capital markets. Both buy- and sell-side firms contribute ~80% of BFS revenue, while retail and corp. banking account for a mere 20%. Macro uncertainty and lower spends by capital market firms on digital (as well as cut down on legacy IT) have led to softer growth in 1HCY19 (3.8% YoY). Going ahead, roadblocks due to the tough environment, client-specific issues and higher internalisation pose challenge to a quick turnaround.

HEXW has been impacted by changed priorities in one of the largest clients in the vertical. Some of the impact was visible in 2QCY19, although the maximum of it will be visible in 3QCY19. HEXW expects this to bottom out by the end of the calendar year. That said, HEXW has identified the following trends which will drive growth in BFS over the medium-to-long term, transition of LIBOR contracts, operational transformation in capital markets, focus on retail banking by strengthening partnership with Backbase, digitisation in corporate banking space and enterprise data management & data governance.

Healthcare & Insurance – the second largest vertical for HEXW (19.2% of revenues) – has delivered a three-year CAGR of 15% (above the company average). Turnaround in the segment followed the changes in leadership in CY15.
Our price target of INR390 discounts forward earnings by 15x. Maintain Neutral.