Since November, Hexaware Technologies Ltd’s market capitalization has languished at about Rs290 crore. The cash on the company’s books was nearly as high at Rs285 crore, in an instance similar to that of Patni Computer Systems Ltd, which this column discussed last week. In other words, its core business was being valued at about zero.
This changed a week ago, when the stock jumped by 66% in a single trading session on rumours that the firm could be an acquisition target. Now, adjusted for the cash on the company’s books, the core business is valued at Rs166 crore, or about 2.8 times past earnings.
Ever since Hexaware’s misadventure with exotic derivatives in 2007, which resulted in a loss of Rs103 crore, the market has been wary about its large foreign exchange hedging exposure.
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Hexaware generated revenues of $255 million in 2007 (Rs1,255 crore today), but had a hedge position of $389 million at the beginning of 2008. This has been pared down to $171 million—still high.
The hedge is at an average rate of 40.75 to a dollar, which means the company has an opportunity loss of roughly Rs140 crore on its hedges.
The company says all its hedges now consist of plain-vanilla forward contracts and put options, and there is no exposure to exotic options. The market, however, is still being cautious.
Hexaware’s core business is not expected to do well either. In 2008, the company’s revenues grew by only 3.9% in dollar terms, while the industry is expected to have grown by 17-20% in the same period. Its performance this year could be much worse, going by its guidance target for the March quarter. It expects revenues to drop by 14-18% on a sequential basis in the three months to March.
The only other information technology company to have given its guidance this month, Cognizant Technology Solutions Corp., said that its expects revenues to drop by about 2.5% sequentially.
Though the two companies are not comparable, Hexaware’s performance is substantially lower and reflects to some extent the pain small and medium-sized technology companies would face in the downturn.
The company now has a pre-tax margin of merely 6.5%, and further pricing cuts by clients could even lead to losses, especially since a large portion of foreign currency receivables are hedged at about 41 a dollar. These concerns explain the company’s low valuation.
Graphics by Ahmed Raza Khan / Mint
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