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Hexaware follows January-December fiscal year (Hemant Mishra/Mint )
Hexaware follows January-December fiscal year (Hemant Mishra/Mint )

Hexaware must overcome near-term hurdles to reap investment benefits

  • Analysts fear the weakness in banking and financial services may weigh on the firm’s revenue growth
  • Hexaware follows January-December fiscal year

Shares of Hexaware Technologies Ltd have fared well, outperforming the NSE IT index so far this year. The company withstood business challenges relatively better, delivering double digit revenue growth despite the slowdown in the banking and financial services vertical, a key one for Hexaware.

What’s more, in an analyst meeting this week, the management exuded confidence about sustainability in revenue growth rates, although near-term trajectory can be bumpy. Excluding acquisitions, the company indicated it can sustain 12% revenue growth rate it had delivered in recent years.

The hitch, however, is in the near-term. Analysts fear the weakness in banking and financial services may weigh on the company’s revenue growth in rest of the fiscal year i.e. in the current and next quarters.

Hexaware follows January-December fiscal year.

“Although we have liked Hexaware for its consistent execution in the past, we foresee risks to its 2019 revenue growth outlook due to stiff arithmetic and overall macro scenario," Emkay Global Financial Services Ltd said in a note.

Growth in banking and financial services vertical which generates almost 40% of Hexaware’s revenues moderated in recent quarters due to changed priorities at one large client and general slowdown in spending.

“Some of the impact was visible in 2Q 2019, although the maximum of it will be visible in 3Q 2019. Hexaware expects this to bottom out by the end of the calendar year," analysts at Motilal Oswal Financial Services Ltd said in a note.

The company is working on the problem. It is enhancing service offerings especially in emerging technologies. The recent Mobiquity acquisition is a case in point. The acquisition will build front-end capabilities and enables Hexaware to provide end-to-end services in customer experience transformation for clients.

According to analysts, together, Hexaware and Mobiquity are pursuing 16 cross-selling opportunities. “Mobiquity acquisition boosted the company’s customer experience transformation capabilities, and it is playing out broadly in line with expectations," analysts at SBICAP Securities Ltd said in a note.

Hexaware expects the traction in customer experience coupled with healthy growth in infrastructure management and business process segments to deliver to help it achieve the growth guidance. Hereon, the ability of the company to overcome the near-term slowdown in banking and financial services business vertical has to be seen.

Profitability is crucial too. Like for most information technology (IT) services companies, the shift to new-age services and the resultant investments crimped gross margins of Hexaware. While the investment intensity is expected to reduce, deal ramp-up costs and talent shortages are weighing IT services companies’ profitability.

If Hexaware is able to manage its profit margins, then healthy revenue growth should lead to a commensurate improvement in earnings.

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