Retain ‘reduce’ on Hexaware Technologies with a new target price of R188 (earlier R165), which is based on 12x one-year forward EPS of R15.6 up to March 2017 (vs 11x earlier), one notch higher on better near-term growth/higher dividend support.
The 12x multiple is at a ~20% premium to Hexaware’s three-year average on better near-term growth and higher dividends. We estimate 14% $ revenue CAGR, largely flat 18.5% Ebitda margins and 20% EPS CAGR over FY14-16f.
Hexaware has outperformed CNX IT by 48% over the past six months due to better-than-expected revenue growth in the past three results (6% CQGR over Q2-Q4FY14). However, we remain cautious on further outperformance by the stock given our concerns over high top 10 client concentration (~53% of revenue) and historical volatility in growth.
Growth is largely skewed towards on-site, with 84% of incremental revenue contribution in FY14 — which could impact gross profit margins going forward.
We look for largely unchanged $ revenue growth of 16.5 and 11.6% in FY15f and FY16f (implying 2.8% CQGR over eight quarters) and find current valuations expensive at 15.5x FY16f EPS of R15.4 (par/premium to HCL Tech and Tech Mahindra, which are more sustainable growth stories, in our view).