Hexaware: Worst priced in

After slipping 31 per cent over the last two months, analysts now feel that the stock discounts all negatives and the current levels present a good entry point.

A downward revision in revenue guidance for the December 2012 quarter saw Hexaware’s stock slip 11.64 per cent in the last two trading sessions to Rs 94 levels by Monday.

The company has revised its revenue growth rate (in dollar terms) to 18 per cent ($92 million versus $94 – 96 million earlier), compared to the earlier estimate of 20 per cent year-on-year. The revision comes on the back of unanticipated changes made by one of its top clients with respect to the project delivery method, scope and timeline thereby impacting Hexaware’s revenues in the December 2012 quarter.

For the full year (Hexaware follows January – December financial year) 2012, revenues are now pegged at $364.1 million, as compared to $366 - $368 million earlier.

Impact

This impact on revenues is likely to be one-time and will be reflected in December 2012 quarter only. On the positive side, the client does not seem to have any issues with Hexaware’s deliverables quality and governance, says Vimal Gohil at Asit C Mehta investment Intermediates.

However, the management is unsure whether the revenues from this client will be accounted from early 2013 onwards, as the timeline of the project execution has changed. This adds to some amount of uncertainty. In this backdrop, analysts expect the ramp-up of this contact somewhere in June’13 quarter or even later.

Besides this one-time impact, the company is also facing pressure on margins. Gohil says that the company has already incurred significant costs in terms of manpower, software and transition expenses during the implementation of this large and complex engagement. It has not accounted for any revenues against these costs, thereby pressurising the operating margins.

Ankita Somani at Angel broking feels that the management’s indication of 500-700 basis point (bps) impact on operating margins during December 2012 quarter seems to be disproportionate as the revenue cut is of $2.5-4.5 million, while earnings before interest, taxes, depreciation and amortisation (EBITDA) is being cut by $6-7million.

Outlook

All this has led analysts tweaking their 2012 and 2013 revenues, operating margins as well as the earnings estimates. However, after slipping more than 31 per cent since closing highs of Rs 138.10 on 12 September 2012, the stock captures all the negatives at these levels, analysts say.

Urmil Shah at Kim Eng believes the markets ignored Hexaware’s ability to grow faster than the sector, its high Returns on Equity (RoE) and attractive dividend yield. Somani at Angel Broking, too, observes that Hexaware captures most of the negatives at this juncture and the current level makes a good entry point to the stock. She has a BUY rating on the stock.

Out of 30 analysts polled by Bloomberg, 15 have BUY rating on the stock, while 10 have HOLD rating. The consensus target price for the stock trading at Rs 94 and trading 8.4x CY12 earnings stands at Rs 115, indicating a 22 per cent upside from here on over the next 12 months.