Hexaware Technologies Ltd reported results along expected lines for the December quarter, with both revenue and operating profit coming close to what the company had guided in early December.
The company had issued a profit warning saying that revenue would decline by 1% sequentially to $92 million owing to unforeseen changes in the scope as well as the timing of a large project from one of its top 10 clients.
Hexaware reported revenue of $92.4 million. Additionally, the company had said that it expected margins to be hit by 500-700 basis points in the December quarter, as it had already made investments in the project. It reported a 480 basis points decline in margins.
The company’s shares have fallen by nearly 24% since its profit warning and investors now seem to be relieved that things haven’t turned out to be worse than expected. What’s more, Hexaware expects revenue to grow by 1.7-2.8% in the March quarter and by at least 3.6-4.3% in the remaining three quarters of the year. It has also guided for a 150-200 basis points improvement in profit margins in the March quarter. The company’s post-results commentary suggests that the worst is over.
Hexaware shares rose by over 3% on Monday, but continue to trade at levels more than 20% lower since the profit warning. Clearly, investors still feel that the company isn’t out of the woods. Besides, the profit warning reminded them of the risks associated with high client concentration.
It’s worth noting here that even though Hexaware was effectively left in the lurch by one of its top clients, it hasn’t completely disengaged with the client, as this will deal a big blow to revenue. Just 10 clients account for over 50% of revenue and the company’s top client accounts for nearly 15% of total revenue.
Having said that, one can’t overlook the fact that the company is still growing well ahead of industry growth rates. In 2012, it grew by 18% in dollar terms, while industry growth was around 10%.
And unlike many of its peers, Hexaware follows a liberal dividend policy. It paid out Rs.5.40 per share from profits generated in 2012, which works out a dividend yield of 6.42%.
The high yield should provide a floor to the stock price, and if the company can manage to beat industry growth again in 2013, investors can expect a meaningful upside as well.