Hexaware Technologies Ltd’s shares have been among the best performing in the information technology (IT) services sector in the past year.
Until its results announcement last week, they had risen by over 100%, compared with a 20% increase in the CNX IT index. Expectations, clearly, were running high.
So, even though the company reported a 19.9% year-on-year (y-o-y) growth in revenue in dollar terms in the March quarter—far higher than other IT companies—this fell short of the Street’s estimates. After the results announcement, Hexaware shares fell by over 9% in a single trading session. But a shortfall in revenue has been a recurring theme for IT firms in the past quarter; what really upset investors was the accompanying sharp decline in profit margins and a jump in working capital needs.
Operating profit margin fell by 210 basis points (bps), sequentially, and by 150 bps y-o-y. As a result, pre-tax profit rose by only 7.1% y-o-y, despite the near 20% growth in revenue. One basis point is one-hundredth of a percentage point.
In the past year, most of Hexaware’s growth has come from a push for new project starts, with most of the incremental work happening onsite at client sites. This form of work entails lower margins, compared with delivering from offshore sites. On a y-o-y basis, revenue from onsite sites grew 33.5%, while growth in offshore sites was just 4.6%.
Given this structural shift, it won’t be surprising if margins continue to drift lower or stay muted, as they have in the past few quarters.
Besides, while debtor days had been trending down in the past few quarters, they rose by as much as 14 days to 77 days of revenue on a sequential basis last quarter.
Employee attrition, too rose, sharply.
Moreover, the company’s top five clients accounted for 42.8% of revenue last quarter, up from 38.2% in the year-ago March quarter. The increased concentration can pose a risk, as has happened so often with mid-tier and small IT companies with such high contribution from a few clients.
All told, Hexaware’s March-quarter results are a grim reminder that beneath the surface, all’s not as well as its handsome revenue growth of the past few quarters suggests.