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Mid-sized Wonder

Hexaware Technologies is on a roll with strong revenue growth. Find out if you should buy it…

Revenue growth of 40 per cent over the past one year, earnings growth of 67 per cent, returns on capital in excess of 30 per cent and cash worth Rs 400 crores. This is Hexaware Technologies – and it is on a roll.

Strong revenue growth and guidance: Hexaware reported deals worth $200 million in FY12. During the June 2012 quarter, it reported 14 per cent growth in revenues (q-o-q) at $91.2 million driven by volume growth of 4.2 per cent. It added 12 new clients including one large ERP deal of above $100 million. According to the management, the deal pipeline remains stable and it is yet to see any pricing pressure.
Hexaware management has guided a strong revenue growth of 20 per cent (US dollar growth). In a recent disclosure, the company has made public a $100 million deal spread over the next four years coming into effect from Q1CY13 which would require the company to set up a dedicated unit at its Chennai SEZ campus.

Niche presence: Hexaware’s speciality is in capital markets (28.7 per cent of June 2012 quarter revenues) and travel and tourism (20 per cent). Healthcare brings in another 16 per cent of the company’s revenues.

Utilisation and attrition: After a couple of quarters of declining trend, the June 2012 quarter saw improved utilisations. Hexaware reported a utilisation rate of 70 per cent. Attrition levels in this mid-cap company are now at their lowest levels and stand at 9.6 per cent.

Stable Ebitda margins: Hexaware has remarkably managed to expand its Ebitda margins from 7.8 per cent levels (Q1CY10) to 22.9 per cent (Q2CY12) brought about by drastic cost control measures, efficiencies from large deals and improvement in its onsite: offshore mix from 60:40 (CY10) to currently stand at 53:47. The company has been signing longer term contracts with existing clients, helping it keep a handle on employee overheads and improve onsite-offshore mix in its favour.
In the most recent quarter, Hexaware saw its Ebitda margins increase by 53 basis points mainly on the back of the currency benefits. Pulling margins down were offshore salary hikes (1.5 per cent) and visa costs (1.3 per cent). Pricing deteriorated very marginally by 0.5 per cent (onsite) and 0.2 per cent (offshore). Forex loss amounted to Rs 55 million. Billing rates were up for both onsite and offshore clients at 53.4 per cent and 46.6 per cent, respectively. The company does not see any pricing cuts until the environment goes further south.

Outlook and valuations: With Rs 400 crores in cash, acquisitions are on the cards. The company has identified verticals of IMS, BPO and platform-based services as potential targets. The stock trades at a comfortable 10 times its TTM earnings. On a PEG basis that comes to 0.33 times only.Buy.