Shares of HexawareTechnologies Ltd rose by more than 3% on Wednesday after the company got a contract that will result in an annual revenue of $10-15 million (Rs44.5-66.75 crore) starting this year. The company has forecast 2011 revenue at $290 million, which means the new order would add between 3.5% and 5% to its total revenue.
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While the order was important enough to merit a stock exchange announcement, it wasn’t big enough for the company to revise its annual guidance target. With additional revenue of $10-15 million, the revenue growth target could have been raised to 30-32% from the current level of 25%. For now, though, the company has left the target intact.
Even so, the company’s shares have gained as much as 35% in the past one month, at a time when the broader market and the information technology (IT) index of the Bombay Stock Exchange (BSE) both have risen by about 9%.
It’s important to note here that while revenue growth could deviate a few percentage points here or there, profit growth could see a big swing if the company is able to sustain the recent improvement in its margins.
Hexaware’s Ebit (earnings before interest and tax) margin stood at just 6.6% in 2010, primarily owing to extremely low margins in the first two quarters. This was on account of the completion of some large projects, and the company’s inability to replace them with similar projects.
But margins improved to over 9% by the December quarter and the company is now saying that it expects double-digit margins in 2011. If revenue grows by 25% and margins improve to 10% in 2011, the company’s Ebit will jump by as much as 90%.
The Hexaware stock’s rally this year suggests investors expect things to play out according to the above-mentioned script.
Analysts are also enthused about the company’s ability to win deals after a shift in sales strategy, which included new hires for the sales force and moving to a vertical/industry-based approach compared with the earlier horizontal/service lines approach. The new order win mentioned above from an existing client in the US has only reinforced this view.
Nevertheless, considering that the stock has traded at low multiples historically, investors need to be watchful, especially given the sharp rally in the stock in the past month.
Graphic by Paras Jain/Mint
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