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07 October, 2015 12:01 IST
MSFL`s fundamental pick: Hexaware Tech
Source: IRIS | 13 Oct, 2012, 03.07PM
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Following stock have been recommended as fundamental pick by Mansukh Securities and Finance (MSFL):

Hexaware Technologies

Investment Rationale

> Global IT & Outsourcing spending likely to grow rationally...

The contribution of IT & Outsourcing sector, which has been broadly, divided into IT (software and hardware) and BPO services has a prominent amongst others service sector in India; it has been in the range of 5-6% and has consecutively increased its share in GDP. The sector`s compounding GDP contribution demonstrates its continuous growth excluding deceleration during 2008-09 global turmoil. USD75 billion IT industries which employ over 2.5 million people are expected to touch USD225 billion by 2020. The industry is also responsible for bringing lion`s share in the overall forex earned by other sectors in nation. India is now one of the biggest IT capitals in the modern world and has laid firm foot to emerge as a strong player in the global market. India accounts for 55% of global IT-BPO services as they are capable to provide quality IT-BPO services at low-cost, which attracts consumers across globe. The sector however is linked to world economy and any ups/downs hit the earnings. Recent volatility in the global economy has affected this sector; hence the 16% current year`s growth may slow down to around 11-14% in 2012-13 fiscal. However, there is a positive aspect - rupee depreciation in past quarters has cured the losses in to some extent in the short-term. Despite these constrains, the sector is expected to stand its ground considering overall performance.

> Focusing on pertinent top clients will ensure the revenue visibility...

Hexaware has maintained healthy growth in the past years with the help of its top 10 clients; the trend is likely to continue in upcoming periods also. Company`s top 10 clients expected to contribute 53-55% of the total business within next two years. Company is also focusing to expand the client`s portfolio from 10 to 20 in near term and further up to 50 in the longer term. In conjunction with clients expansion, company is also pondering to expand coverage into multiple service offerings & diverse departments in different geographically. Hexaware is also expanding the Account Management Stream from the current Top 20 coverage; to cover top 30 next and further to top 50 clients. These prestigious client likely to offer significant amount of contracts & deals, which will ensure the revenue visibility for the company.

> Focusing on the selected market segments to expand its business operations...

Hexaware is focusing on market segments, which are potentially scalable to expand its key services. Company`s key centric approach towards the niche business segments helps it to place at a competitive positioning in the industry. Company is focusing to expand its business operations  in  its  expertise  key  segments  like  Capital  Markets,  Travel,  and  Healthcare  & Insurance,  ERP,  BI,  QATS,  BPO  and  Remote IMS.  Company  is  also  investing  to  establish differentiation  and  unique  positioning  in  these significant segments  and  apart  from  this company wants to achieve the leadership in niche sub-segments also. Company is extensively focusing on innovation & IP creation and it is also demonstrating the skill for the same with scale in the areas of strength and competitiveness. 

> Increasing overseas presence &Introducing new Technologies...

Hexaware has established its coverage visibility in India & Australia and after expanding its presence in domestic markets, Hexaware is now, increasing its operations in other countries, company has already leveraged its presence Germany and focusing on one of the biggest market of Europe at UK. Hexaware is now envisaging the prospective growing countries in Latin American and South American countries like Mexico. As company suppose the onsite rates in IT services would be three times more than off shoring or a near shore centre like Mexico (if it`s a US client).  Moreover, Hexaware is investing to innovate in new technologies like mobility, big data,  social  networking  platforms,  which  have  wider  scope  across  the  globe.  However, company is not considering these areas as major growth areas in terms of revenue but it will work like a value-add services to attract the value customers.

> Risks & Concerns

While taking into the consideration the current financially instability of the global economy, I would like to say that, continuation of economic slowdown will also affect the IT spending across the globe and any financial crisis especially in US & European regions would distress the growth and revenue visibility of IT companies too. Apart from this there are certain other risk involve  while  doing  business  operations such  as  IT  Security  Risk;  Market  Risk;  Financial Reporting Risk; Exchange Risk; Contractual Compliance Risk; other Compliance Risks are the broad categories of Risks that are monitored and mitigated by the company from time to time.

> Valuations & Recommendations

Hexaware is trading at PE of 9.6 x of its estimated earnings per share of Rs 11.79 for CY12E. Further, we are expecting with the growth of global financial sector the spending on IT also likely to remain positive for the upcoming periods, though the developed countries likely to play a major role in the growth but emerging markets would also be a growth driver for the technology sector. Further, with the handful of active clients & deals, Hexaware, with focus on key market segments is also expanding its business operations in Latin and South American countries, which will endow it to enter the new emerging markets in American regions also. Hence, from the medium to long-term point of view, we recommend to keep buy on dips strategy for the stock with the target price of Rs 141.

> Financials - Consolidated

In the last five years (CY06-CY11) the consolidated Revenue of Hexaware has grown at CAGR of more than 11%, Operating Profit of the company grew at little over 15% while PAT grew at CAGR of 16.5% during the same period. In CY11, the consolidated Net Sales of company grew by 37.5% to Rs 14.50 billion over CY10 while owing to efficient operational activity the Operating Profit phenomenally jumped 297% to Rs 2.61 billion and PAT of the company also grew at 148% to Rs 2.67 billion for the same period.

In Q2CY12, The consolidated Net Sales of the company surged 49.7% to Rs 5 billion from Rs 4.38 billion in Q2CY11, Operating Profit grew 115% to Rs 1.08 billion from Rs 504.1 million whereas PAT surged 47.8% to Rs 890.3 million from Rs 602.4 million compare to corresponding quarter of the last year. OPM of the company for the same period improved by 658bps to 21.67% while due to higher tax outgo the PAT margin of the company marginally declined by 23bps to 17.80%.

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.

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