Hexaware’s 3QCY17 results delivered a beat on EBITDA and PAT. Revenues at USD154mn were up 0.9% QoQ and marginally above our estimates (PLe: USD153.5mn). Constant currency revenue growth for the quarter stood at 0.4% QoQ. EBIDTA margin (Ex– ESOP charge) came at 18.3% up 80bps QoQ and above our estimates (PLe: 16.5%). PAT at Rs1420mn was 22% above our estimates aided by margin beat, higher other income led by forex gains and lower tax rates.
Led by steady execution in 3QCY17, Hexaware has retained USD revenue growth guidance to 14‐15% for CY17E. Hexaware remained confident of achieving the upper end of revenue guidance for CY17E. This would imply a sequential decline in USD revenues by 1% QoQ in 4QCY17. We note that 4QCY17 will have the full impact of ramp down of a portion of business from a large account (which is as per managements earlier guidance). While weakness in two large accounts is weighing on revenue growth in 2HCY17, Hexaware continues to show strong traction in other client buckets. Revenues from Top 6‐10 clients were up 10.4% QoQ and 58% YoY. Revenues from Top 10 ‐20 clients grew by 12.6% QoQ and 31.2% YoY. TCV wins from new clients stood at USD43mn for the quarter.
We upgrade our USD revenue growth assumptions and model Hexaware USD revenues to grow by 15.2/11.5% for CY17E/CY18E (vs. 14.5/10% modelled earlier). Led by 3QCY17 margin beat, we upgrade EBIDTA margin assumption to 17.6/17.4% for CY17/CY18E (vs 17.1/17.1% modelled earlier). We raise EPS estimates by 6.4/3% for CY17/CY18E to Rs16.7/18/sh. Hexaware revenues are poised to grow at much faster pace compared to larger peers in CY17E (Infosys/ TCS poised for ~7‐8% USD revenue growth for FY18E). Hence, Hexaware stock P/E multiples will continue to reflect the growth premium. Our EPS estimates are retained at Rs16.7/18/19.8/sh for CY17/CY18E/CY19E. Stock trades at 15.3/14x CY18/CY19E. Hexaware currently trades at 13% discount to TCS on one year forward P/E multiples. Robust strategy (new deals wins aided by Shrink IT theme), consistent discipline on margins are key positives. TP raised by 9% to Rs295/share (15x Sep19E EPS vs 14.5x June19E earlier). Retain Accumulate.
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