Buy Hexaware Technologies Ltd for the Target Rs.930 by Motilal Oswal Financial Services Ltd
Uncertain macros lead to a soft quarter
Margins hit by one offs
* Hexaware Technologies (HEXT) reported revenue of USD382m in 2QCY25, up 1.3% QoQ in CC terms vs. our estimate of 2.2% QoQ CC. Growth was led by Banking (up 13.5% QoQ), followed by Travel and Transportation (up 7.2% QoQ). Adj. EBIT margin at 14.1% (down 10bp QoQ) was broadly in line with our estimate of 14.3%. PAT rose 16.1%/38.3% QoQ/YoY to INR3.8b (above our est. of INR3.5b).
* For 2QCY25, HEXT’s revenue/adj. EBIT/PAT grew 11.1%/26.8%/38.3% YoY in INR terms. We expect its revenue/EBIT/PAT to grow 9.7%/19.5%/22.2% YoY in 3QCY25.
* Amid a cautious demand environment, HEXT is gaining share through consolidation deals; also, pressures in large accounts appear to be tapering. Further, its improving margin trajectory bodes a good return profile for the company amongst peers. We reiterate our BUY rating with a TP of INR930 (based on 32x Mar27E EPS), implying a 26% potential upside.
Our view: Growth expectation lowered
* Below-par performance amid elongated decision cycles: HEXT delivered a modest 1.3% QoQ CC growth in what is typically its seasonally strongest quarter. While management expects 3Q to outpace 2Q, the impact of large deal wins is likely to be reflected with a lag. Macro softness persists, evident in slower client decision-making. Though growth expectations for the remainder of the year have been slightly moderated, HEXT continues to demonstrate strong execution capabilities. We forecast YoY CC growth of 8.2%/11.6% for CY25/CY26E.
* Financial Services & Travel to lead growth ahead: Banking and Travel & Transportation led growth in 2Q. While banking growth benefited from a benign 1Q base, the vertical is expected to grow in line with the company's average going forward. Notably, Financial Services (~30% of revenues), which had seen a slowdown over the past few quarters, is now poised to lead growth through the remainder of the year. In contrast, Manufacturing and Consumer are likely to remain muted due to macro pressures.
* Deal pipeline velocity intact…: HEXT continues to actively chase large consolidation opportunities, though conversion timelines are slightly stretched due to elongated decision-making cycles. That said, commentary around the steady progress in small- and mid-sized deals was encouraging.
* …margin, however, takes a hit due to one-offs: The reported EBITDA margin improved by 50bp QoQ, supported by a 100bp operational uptick (driven by better utilization and a favorable offshore mix), partially offset by currency headwinds and one-offs. The one-offs included headwinds such as restructuring costs (100bp), acquisition costs (40bp), provision for customer (240bp), and impairment on account of acquisition (120bp). Combined, the reported EBIT margin stood at 10.1%.
* ERP implementation costs, originally slated to end in 2QCY26, are ongoing but tapering. We also note that the offshore mix is improving and will be a key margin lever going forward. Management’s reaffirmation of its EBITDA margin guidance at 17.1-17.4%, despite continued ERP costs, is encouraging.
Valuation and changes to our estimates
* Amid a cautious demand environment, HEXT is gaining share through consolidation deals; also, pressures in large accounts appear to be tapering. Further, its improving margin trajectory bodes a good return profile for the company amongst peers. Our estimates are broadly unchanged. We expect a PAT CAGR of 16.1% over CY25-27E. We reiterate our BUY rating with a TP of INR930 (based on 32x Mar27E EPS), implying a 26% potential upside.
Miss on revenue but in-line margins; EBITDA guidance intact
* HEXT’s USD revenue came in at USD382.1m; up 1.3% QoQ in CC terms vs. our estimates of an increase of 2.2% QoQ CC.
* Growth was led by Banking (up 13.5% QoQ), followed by Travel and Transportation (up 7.2% YoY). Healthcare & Insurance/Hi-tech & Professional services were up 2.1%/2.9% QoQ in USD terms.
* In terms of geographies, Europe was up 7.9% QoQ, and Asia Pacific grew 2.2% QoQ in USD terms.
* The reported EBIT margin stood at 10.1%. However, after adjusting for one-offs, including acquisition-related costs (INR128m), specific customer provisions (INR782m), and impairment of an earlier acquisition-linked customer contract (INR394m), the normalized EBIT margin was 14.1%, broadly in line with our estimate of 14.3%.
* The company maintains its EBITDA outlook of 17.1% - 17.4% given earlier, even with ERP costs continuing.
* PAT was up 16.1%/38.3% QoQ/YoY to INR3.8b (above our est. of INR3.5b).
* The headcount rose to 32,410 (up 2.6% QoQ) in 2QCY25. Attrition (LTM) decreased by 10bp QoQ to 11.1%. Utilization was up 160bp QoQ to 83.7%.
Key highlights from the management commentary
* Macro softness continues; the slowdown is seen as cyclical rather than AIdriven. While AI is creating a different impact, it hasn't yet become material.
* Decision-making has slowed, leading to lowered expectations for the rest of the year. If trade deals materialize in the next few weeks, it may lift some of the uncertainty.
* The acquisition of SMC was a key business development. The GCC model represents a significant growth opportunity, and SMC provides access to GCCled spending.
* There is substantial demand for cloud services, including both migration and operations.
* Management expects 3Q to deliver stronger QoQ CC growth than 2Q. However, large deal wins will not reflect in 3Q results.
* The CY29 revenue ambition of USD3b remains unchanged.
* Financial Services (FS) and Travel & Transportation (T&T) are expected to drive growth.
Valuation and view
* Amid a cautious demand environment, HEXT is gaining share through consolidation deals; also, pressures in large accounts appear to be tapering. Further, its improving margin trajectory bodes a good return profile for the company amongst peers. Our estimates are broadly unchanged. We expect a PAT CAGR of 16.1% over CY25-27E. We reiterate our BUY rating with a TP of INR930 (based on 32x Mar27E EPS), implying a 26% potential upside.
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