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Hexaware Technologies 4QCY13 results update

February 7, 2014, Friday, 18:57 GMT | 13:57 EST | 23:27 IST | 01:57 SGT
Contributed by Nirmal Bang


Hexaware Technologies’ (HTL) 4QCY13 USD revenue grew 1.4% QoQ at US$100.1mn, below our estimate by 2%. Rupee revenue declined 0.2% QoQ at Rs6,200mn. Owing to slower revenue growth and higher employee costs, EBITDA margin declined 131bps QoQ at 22.5% (133bps/82bps below our/Bloomberg consensus estimates, respectively). Margins were down, despite a major rise in employee utilisation rate by 280bps at 74.6% (71.8%). Lower forex losses aided net profit to rise 2% QoQ at Rs1,007mn. However, it was 8.5% below our estimate but in line with Bloomberg consensus estimate. HTL increased its dividend payout ratio for CY13 to 87% from 47% in CY12, with interim dividend at Rs7.5/share and final dividend at Re1.0/share, taking the total dividend for CY13 to Rs11.1/share. The poor operating performance is a disappointment. While the higher dividend payment could cap major downside, given that dividend yield is nearly 8%, a stock re-rating is unlikely pending material improvement in the revenue growth trajectory in a strong demand environment. We have retained our Hold rating on HTL with a revised target price of Rs153 (Rs138 earlier), as we roll over our valuation to CY15E earnings.
 
Revenue disappoints: HTL posted a 1.4% QoQ rise in 4QCY13 US dollar revenue at US$100.1mn, below our estimate of US$102.2mn. In rupee terms, revenue fell 0.2% QoQ at Rs6,200mn. While we take the point about the quarter being impacted by the holiday season and it being traditionally a seasonally weak quarter, given that considerably larger peers like HCL Technologies and Tata Consultancy Services have delivered much higher revenue growth, this cannot be used as an excuse to justify poor revenue growth. The management stated that even 1QCY14 will be a soft quarter. From a delivery point of view, offshore revenue rose 2% QoQ, while on-site revenue rose 0.8% QoQ. From a vertical perspective, it was the banking and capital markets segment that grew by a strong 4.5% QoQ.
 
Margins decline on low revenue growth, higher employee costs: HTL posted a 131bps QoQ fall in EBITDA margin at 22.5% on lower revenue and higher employee costs (133bps/82bps below our/Bloomberg consensus estimates, respectively). Lower forex losses aided a 2% QoQ rise in net profit at Rs1,007mn, which was, however, 8.5% below our estimate (largely in line with Bloomberg consensus estimate).
 
Retain Hold rating, operational improvement has to precede stock re-rating: The poor operating performance in 4QCY13 is a disappointment, and the soft outlook for 1QCY14 is not a good sign. While higher dividend could cap major downside, given that the dividend yield is at nearly 8%, a stock re-rating is unlikely pending material improvement in the revenue growth trajectory in a strong demand environment. We have retained our Hold rating on HTL with a revised target price of Rs153 (Rs138 earlier), as we roll over our valuation to CY15E earnings.