05 FEB 2016 Quarterly Update HOLD Target Price: Rs 252 Q4 lackluster; CY16 holds promise Hexaware s Q4CY15 performance was lower than our estimates. Revenue growth and margin were largely impacted due to furloughs, calendar effect (lower working days), and Chennai floods. Outlook and strategy: Management is targeting to grow higher than industry (SSCOM: 10-12%) in CY16 (Q1 and Q4 are seasonally soft quarters). Confidence stems from strong deal wins (total contract value: USD 120 mn) in CY15 which lends revenue visibility. However, margin will be similar to CY15 (EBITDA: ~17%). Hexaware s strategy, "Shrink IT, Grow Digital" is targeted at large clients and has seen early signs of success around IMS, BPO and Testing in its recent wins. Management indicated effort savings of 30-50% in IMS and BPO can be achieved. CMP : Rs 235 Potential Upside : 7% MARKET DATA. of Shares : 302mn Free Float : 29% Market Cap : Rs71bn 52-week High / Low : Rs335 / Rs203 Avg. Daily vol. (6mth) : 1.2 mn shares Bloomberg Code : HEXW IB Equity Promoters Holding : 71% FII / DII : 11% / 8% Q4earnings concall highlights Hexaware delivered Q3 revenue of USD 124mn (down~0.8% QoQ; constant currency: down 0.5 % QoQ), largelydue tohigher furloughs/ Chennai (loss: USD 1.19 mn), calendar effect (loss: USD 2.46 mn). This was partly offset by volume growth (~USD 1 mn), and better mix (~USD 1.5 mn) Gross margin (34.8%) decline of 180 bps was largely due to calendar (-106 bps), salary hike (-71 bps), bonus (-32 bps), higher onsite mix (-27 bps) and other expenses (-19 bps). This was partly offset by higher utilization (60 bps). EBIT margin(14.3%) was down 210 bpsqoq due to furloughs/ wage increases (70 bps) and impact of costs related to Chennai floods and CSR activities Top 5 clientscontinued to decline in Q4 (2% QoQ) but management reiterated there are no client specific issues Deal wins during the quarter stood at USD 20mn taking CY15 tally to USD 120 mn. We believe the strong deal wins in CY15 provide visibility for revenue growth. Average deal tenure is 4 years (Continued on page 2 ) Financial summary (Consolidated) Sales (Rs mn) 25,817 31,235 36,276 41,546 Adj PAT (Rs mn) 3,200 3,932 4,755 5,524 Con. EPS* (Rs) - - 15 18 EPS (Rs) 11 13 16 18 Change YOY (%) (15.8) 22.0 20.9 16.2 P/E (x) 22.2 18.2 15.0 12.9 RoE (%) 25.7 28.9 32.7 36.8 RoCE (%) 35.3 34.8 39.4 45.5 EV/E (x) 14.3 12.4 10.4 8.8 DPS (Rs) 9 9 11 12 Source: *Consensus broker estimates, Company, Axis Capital Key drivers CY15 CY16E CY17E USD rev (mn) 485 543 617 Growth 15% 12% 14% SG&A (% of sales) 19% 18% 18% EBITDA margin 17% 18% 19% Price performance 200 150 Sensex Hexaware Technologies 100 50 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 01
( Continued from page 1) Broad-based client additions: Client additions maintained momentum with 9 new clients added in the quarter across verticals and key geographies The company added 5 clients in the Manufacturing and Consumer verticals, 2 clients in Banking and Financial Services segment and Healthcare & Insurance. Of the 9 clients added in Q4, 5 were added in rth Americas, 3 were added in Europe and 1 in APAC Management is comfortable with utilization being in a narrow band of 72-73% (currently: 69.7%) Valuations rich: We expect USD revenue CAGR of 13% overcy15-17e. Our EPS for CY16E/17E stands at Rs 15.7/ 18.2. Our target price of Rs 252 (16x CY16E) implies 7% upside from CMP of Rs. 235; hence we reduce our rating to HOLD (BUY earlier). The stock trades at 15x/13x CY16E/CY17E EPS. Exhibit 1: Results update(rsmn) Quarter ended 12 months ended Dec-15 Dec-14 % Chg Sep-15 % Chg CY16E CY15 % Chg Net sales 8,195 7,118 15.1 8,184 0.1 36,276 31,235 16.1 EBITDA 1,302 1,418 (8.2) 1,460 (10.8) 6,446 5,355 20.4 Other income 88 (112) - 97-195 173 - Depreciation 131 113-121 - 544 482 - PBT 1,259 1,193 5.5 1,436 (12.3) 6,096 5,046 20.8 Tax 265 254-321 - 1,341 1,114 - Other provisions 0 0-0 Adjusted PAT 994 939 5.9 1,115 (10.9) 4,755 3,932 20.9. of shares (mn) 304 302-304 - 304 304 - EBITDA margin (%) 15.9 19.9-403 bps 17.8-195 bps 17.8 17.1 62 bps PBIT margin (%) 15.4 16.8-140 bps 17.5-218 bps 16.8 16.2 65 bps EPS - Annualized (Rs.) 13.1 12.4 5.1 14.7 (10.9) 15.7 13.0 20.8 Source: Company, Axis Capital 02
Financial summary (Consolidated) Profit &loss (Rsmn) Net sales 25,817 31,235 36,276 41,546 Other operating income Total operating income 25,817 31,235 36,276 41,546 Cost of goods sold (16,278) (20,062) (23,136) (26,266) Gross profit 9,539 11,173 13,140 15,280 Gross margin (%) 37 36 36 37 Total operating expenses (4,763) (5,818) (6,695) (7,578) EBITDA 4,776 5,355 6,446 7,702 EBITDA margin (%) 18 17 18 19 Depreciation (440) (482) (544) (706) EBIT 4,336 4,873 5,901 6,996 Net interest Other income 218 91 195 272 Profit before tax 4,180 5,046 6,096 7,268 Total taxation (980) (1,114) (1,341) (1,744) Tax rate (%) 23 22 22 24 Profit after tax 3,200 3,932 4,755 5,524 Minorities Profit/ Loss associate co(s) Adjusted net profit 3,200 3,932 4,755 5,524 Adj. PAT margin (%) 12 13 13 13 Net non-recurring items Reported net profit 3,200 3,932 4,755 5,524 Balance sheet (Rsmn) Paid-up capital 602 603 603 603 Reserves & surplus 12,304 13,729 14,169 14,660 Net worth 12,906 14,332 14,772 15,263 Borrowing Other non-current liabilities 438 873 934 997 Total liabilities 17,655 20,641 21,329 22,618 Gross fixed assets 7,730 9,305 11,134 12,411 Less: Depreciation (2,591) (3,073) (3,618) (4,324) Net fixed assets 5,138 6,232 7,517 8,087 Add: Capital WIP 350 257 450 500 Total fixed assets 5,489 6,489 7,967 8,587 Total Investment 5 - - - Debtors 3,656 4,407 5,069 5,805 Cash & bank 2,865 4,864 4,541 4,048 Loans & advances 538 (2) (2) (2) Current liabilities 4,311 5,435 5,623 6,359 Net current assets 5,829 6,604 5,617 5,362 Other non-current assets 2,021 2,113 2,122 2,310 Total assets 17,655 20,641 21,329 22,618 Source: Company, Axis Capital Cash flow (Rsmn) 05 FEB 2016 Quarterly Update Profit before tax 4,180 5,046 6,096 7,268 Depreciation & Amortisation (440) (482) (544) (706) Chg in working capital (563) 1,225 663 (238) Cash flow from operations 3,011 5,677 5,962 5,992 Capital expenditure (523) (1,482) (2,022) (1,326) Cash flow from investing (523) (1,477) (2,022) (1,326) Equity raised/ (repaid) 2 1 - - Debt raised/ (repaid) Dividend paid (3,321) (3,164) (3,840) (4,480) Cash flow from financing (3,319) (3,162) (3,840) (4,480) Net chg in cash (831) 1,037 100 185 Key ratios OPERATIOL FDEPS (Rs) 11 13 16 18 CEPS (Rs) 12 15 17 21 DPS (Rs) 9 9 11 12 Dividend payout ratio (%) 89 67 67 67 GROWTH Net sales (%) 13 21 16 15 EBITDA (%) (7) 12 20 19 Adj net profit (%) (16) 23 21 16 FDEPS (%) (15.8) 22.0 20.9 16.2 PERFORMANCE RoE (%) 25.7 28.9 32.7 36.8 RoCE (%) 35.3 34.8 39.4 45.5 EFFICIENCY Asset turnover (x) 2.7 3.2 3.7 3.9 Sales/ total assets (x) 1.4 1.6 1.7 1.9 Receivable days 52 52 51 51 Payable days 12 11 11 11 FINCIAL STABILITY Current ratio (x) 2.4 2.2 2.0 1.8 VALUATION PE (x) 22.2 18.2 15.0 12.9 EV/ EBITDA (x) 14.3 12.4 10.4 8.8 EV/ Net sales (x) 2.6 2.1 1.8 1.6 PB (x) 5.5 5.0 4.8 4.7 Dividend yield (%) 4.0 3.7 4.5 5.2 Source: Company, Axis Capital 03
1. Business Activity: Disclosures: Axis Securities Limited (ASL) is engaged in the business of providing Retail broking services & distribution of various financial products. ASL is also registered with SEBI as Research Analyst under SEBI regn.no.inh000000297 2. Disciplinary History: There has been no instance of any Disciplinary action, penalty/stricture etc. levied/passed by any regulators/administrative agencies against ASL and its Directors. Pursuant to SEBI inspection of books and records of ASL as a Stock Broker, SEBI has issued an Administrative warning to ASL in 2014. 3. Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. 4. Details of Associates: ASL is a 100% subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company. The following are the SEBI Registration s. Particulars Merchant Banking (Category 1) Bankers to the Issue Debenture Trustee Custodian of Securities NSDL CDSL Clearing Member (MCX-SX Futures & Option) Clearing Member (NSE Future & Options) Clearing Member (BSE - Future & Options) Trading Clearing Member (NSE Currency Futures) Trading Clearing Member (MCX Currency Futures Trading Clearing Member (BSE Currency Futures) Trading Clearing Member (USE Currency Futures) Portfolio Manager Other Associates are as follows: Sr. Name of the Associates 1 Axis Private Equity Limited 2 Axis Trustee Services Ltd 3 Axis Asset Management Company Limited 4 Axis Mutual Fund Trustee Limited- It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. 5 Axis Capital Limited - It is engaged in the business of providing stock broking services mainly to Institutional clients and HNIs and also into distribution of financial products. It is also a SEBI register 04
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