Hexaware Technologies Ltd has come back rather well after a poor start to its fiscal year ended December. In the first quarter ended March, revenue had fallen by 12% sequentially and earnings before interest and tax (Ebit) declined by as much as 68%. This was largely because of the completion of some large projects, and the firm’s inability to replace them with similar ones. Hexaware had also taken a hit on account of unfavourable forex movements back then.
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But things have looked up considerably since. Revenue growth stood at double-digit levels in the next two quarters and in the last quarter ended December, revenue grew by 9% in dollar terms. What’s more, Ebit rose by an impressive 54% in rupee terms, thanks to a 300 basis points improvement in margin.
Profits are still much lower than year-ago levels, but the turnaround has been commendable. According to analysts, the company has been successful at winning deals after a shift in its sales strategy, which included hiring about 16 new recruits in the sales force and moving to a vertical/industry-based sales approach, compared with the earlier horizontal/service lines approach. Hexaware’s relatively high exposure to the BFSI (banking, financial services and insurance) sector and the Americas region has also helped, since growth in these segments have been relatively higher. According to an analyst, the firm has done well at getting increased revenue from its top clients. This is reflected in an increase in the share of revenue from the top five clients from 35% in the December 2009 quarter to 38.1% last quarter.
The company has guided for a minimum 25% growth in 2011, which is higher than Nasscom’s target of 16-18% growth in the industry’s revenue in the year till March 2012. Hexaware has also said that revenue would grow by 5% in the quarter ended March, indicating that the growth momentum should continue. In the remaining quarters, revenue needs to grow by just 2.3% to meet the annual target.
Assuming earnings growth tracks the rise in revenue, the firm should end the year with an earnings per share of Rs9.30 in this calendar year, which discounts the current share price by 12 times. This isn’t particularly inexpensive for a mid-cap IT stock; especially one that has historically traded at a low multiple.
Graphics by Yogesh Kumar/Mint
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