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Business News/ Market / Mark-to-market/  Hexaware poised for weak revenue growth
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Hexaware poised for weak revenue growth

Slowing revenue growth hurt the company's margins and so did higher employee costs

Margins may remain under pressure since the company will be making investments in a new division and salary revisions are also expected in the March quarter.Premium
Margins may remain under pressure since the company will be making investments in a new division and salary revisions are also expected in the March quarter.

Hexaware Technologies Ltd is losing revenue growth momentum. Its sales grew by 1.4% sequentially to $100.1 million in dollar terms, much slower than 4.2% growth in the previous quarter and slightly lower than analysts’ estimates. Hexaware reported a 6.5% sequential decline in revenue growth from the top clients compared with around 13% growth on average it recorded in the last three quarters. It has not lost any clients but the completion of a big project weighed on sales growth, according to analysts.

The company’s pipeline of large deals has shrunk and that does not bode well for it as it has a high reliance on top clients compared with large cap IT companies. Nomura Research, in a 7 February note, said that it was lowering its FY14 dollar revenue growth estimate by 150 basis points and does not expect its 10% growth estimate to be overtaken. Emkay Research has cut its sales estimate by 3% for 2014 and 3.4% for 2015.

Slowing revenue growth hurt the company’s margins and so did higher employee costs—its operating profit margin declined 130 basis points sequentially to 22.5%. Employee expenses as a percentage of net sales increased to 53.3% in the December quarter from 51.1% in the preceding quarter.

Margins may remain under pressure since the company will be making investments in a new division and salary revisions are also expected in the March quarter. The company’s net profit grew 4.6% sequentially to 103.2 crore in the December quarter.

The stock closed up 1.6% on Monday following the results announcement over the weekend, despite underperforming on the revenue growth front, possibly because of a high dividend of 8.50 per share.

The stock has gained 74% in the past one year and is trading at 10.3x price-to-earnings multiple for FY14. That kind of outperformance may be difficult to repeat unless Hexaware manages to reverse the slowdown in revenue growth.

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Published: 10 Feb 2014, 07:43 PM IST
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