Hexaware bounces back smartly from year-ago lows

Hexaware bounces back smartly from year-ago lows

Hexaware Technologies Ltdhas reported strong results for the March quarter. Revenue grew by 6.3% compared with the December quarter, aided by volume growth of about 5%.

What’s more, earnings before interest and tax (Ebit) jumped by 41.4% sequentially, thanks to a 310 basis points rise in profit margin to 12.4%. One basis point is one-hundredth of percentage point.

The company’s margins had fallen to extremely low levels in the year-ago March quarter because of the completion of some large projects, and its inability to replace them with similar projects; unfavourable forex movements had also hit margins then. Therefore, on a year-on-year basis, the improvement in margins is almost 700 basis points and the jump in profit is as high as 222%.

Hexaware had been talking of a return to double-digit Ebit margins in the March quarter for some time. So, the improvement in profitability doesn’t come as a big surprise. Even so, the fact that the company has been able to actually achieve it is heartening from an investor’s perspective.

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According to chairman Atul Nishar, the company still has some levers that will help offset this year’s wage hike and, hence, margins should be upwards of 12% for the whole year. Considering that margins were at 6.9% in 2010, Hexaware is set to post a large increase in profit in 2011.

Despite this, the company’s shares fell by 1.7%, slightly higher than the rate at which the CNX IT Index of the National Stock Exchange fell (1.2%). Of course, analysts have been anticipating a jump in profit and this is reflected in Hexaware’s share price performance in the past one year. While the CNX IT Index has risen by 13% in the past year, Hexaware shares have nearly doubled in value.

The other reason for the subdued movement in the company’s shares post-results could be its lacklustre revenue guidance. While it issued strong growth guidance for the June quarter, indicating a 6-6.5% sequential increase in revenue, it has guided for flat growth in the September and December quarters. According to Nishar, the company has guided for revenue of at least $295 million (around 1,307 crore today) in 2011. The actual revenue for the year may be higher.

Hexaware’s performance has been steady for the past four quarters after the disastrous results in the year-ago March quarter.

Still, considering that the company’s shares have already risen at a fast pace, investors may prefer to wait and see if revenue growth and margins are sustained in the coming quarters.

Graphic by Sandeep Bhatnagar/Mint