 "Margin pressure to continue for Hexaware")
Despite posting higher-than-expected sales for the June quarter, Hexaware has witnessed trimming of earnings estimates by most brokerages. The company’s dismal show on the Ebitda margin front in the quarter as well as management expectations of continued margin pressure, has triggered these cuts.
Analysts believe the company is chasing growth by compromising on profitability. Given that the firm continues to invest in hiring sales and marketing people in its bid to increase revenues from Europe and other markets, its Ebitda margins are likely to be under pressure, say analysts.
Wage hikes will be an additional pressure on margins in the September quarter. Utilisation rate is also likely to be under pressure and remain under 70 per cent in the near term. Given that higher investments will boost Hexaware’s deal kitty, as well as revenues, most analysts have raised their CY14 revenue estimates by three to five per cent. However, volatility witnessed in revenues from large clients over the past few quarters needs to be eased out on a consistent basis for long-term prospects to look up, believe analysts.
However, the management remains confident on revenue growth in the second half and is chasing three-four large deals. “Hexaware’s substantial deterioration in margins limits upside, despite the significant dividend yield and improving growth outlook. Also, the high dividend payout in the past few quarters is likely to heighten the noise on potential de-listing of the stock,” says Ashish Chopra, IT analyst at Motilal Oswal Securities.
The stock trades at rich valuation of 12 times CY15 estimated earnings (closer to its historical higher-band of one-year forward price/earnings ratio of 13 times). This, along with uncertainty on margins, is the key reason why most brokerages remain bearish on Hexaware.
Following the poor show on margins, most analysts have trimmed their estimates for CY14 and CY15. Analysts expect CY14 Ebitda margins to slide down to about 17.5 per cent from 22.4 per cent in CY13. CY15 margins would be at 17.5-18 per cent and will be contingent on the revenue growth posted by the company. “The onsite-centric nature of the new deals and Hexaware’s focus on reviving its revenue growth engine mean its margins will remain under pressure in the medium term. We cut our Ebitda margin estimates by 100-150 basis points for the next two years," write Kotak Institutional Equities analysts in a note.
While most analysts remain cautious on margin outlook, some remain more optimistic. “Although we have scaled our revenue estimates upwards on account of revenue growth acceleration and strong deal flows, the near-term margin outlook remains subdued. Given the strong top line performance, there is an upward risk to margin performance, which can be reviewed on sustained improvement in performance,” says Pratish Krishnan, IT analyst at Antique Stock Broking.
Q2: Mixed show
For the second quarter of CY14, Hexaware’s dollar revenues grew 6.3 per cent sequentially to $102 million (Rs 610 crore) . The growth was higher than expectations of three to four per cent top-line growth and was driven by 3.5 per cent volume growth and 2.5 per cent realisation gains. Shift towards higher onsite revenues (up 10 per cent sequentially) was the key reason for the uptick in realisations. While revenue growth was broad-based across geographies, verticals and service lines, a 250 basis points sequential contraction in margin (to 16.7 per cent) was the key negative.
Higher proportion of onsite revenues, 210 basis points dip in utilisation rate to 70.8 per cent and 210 basis points sequential increase in selling, general and administrative expenses (SG&A) to 19.6 per cent of revenues dragged the margins down. Higher visa and marketing costs, along with additional expenditure on engaging with a consulting firm, drove SG&A expenses. Net profit, too, came in much lower than expectations at Rs 77 crore. Revenues from top 6-10 clients as well as from top client posted good growth in the quarter.
Analysts believe the company is chasing growth by compromising on profitability. Given that the firm continues to invest in hiring sales and marketing people in its bid to increase revenues from Europe and other markets, its Ebitda margins are likely to be under pressure, say analysts.
Wage hikes will be an additional pressure on margins in the September quarter. Utilisation rate is also likely to be under pressure and remain under 70 per cent in the near term. Given that higher investments will boost Hexaware’s deal kitty, as well as revenues, most analysts have raised their CY14 revenue estimates by three to five per cent. However, volatility witnessed in revenues from large clients over the past few quarters needs to be eased out on a consistent basis for long-term prospects to look up, believe analysts.
However, the management remains confident on revenue growth in the second half and is chasing three-four large deals. “Hexaware’s substantial deterioration in margins limits upside, despite the significant dividend yield and improving growth outlook. Also, the high dividend payout in the past few quarters is likely to heighten the noise on potential de-listing of the stock,” says Ashish Chopra, IT analyst at Motilal Oswal Securities.
The stock trades at rich valuation of 12 times CY15 estimated earnings (closer to its historical higher-band of one-year forward price/earnings ratio of 13 times). This, along with uncertainty on margins, is the key reason why most brokerages remain bearish on Hexaware.
Following the poor show on margins, most analysts have trimmed their estimates for CY14 and CY15. Analysts expect CY14 Ebitda margins to slide down to about 17.5 per cent from 22.4 per cent in CY13. CY15 margins would be at 17.5-18 per cent and will be contingent on the revenue growth posted by the company. “The onsite-centric nature of the new deals and Hexaware’s focus on reviving its revenue growth engine mean its margins will remain under pressure in the medium term. We cut our Ebitda margin estimates by 100-150 basis points for the next two years," write Kotak Institutional Equities analysts in a note.
While most analysts remain cautious on margin outlook, some remain more optimistic. “Although we have scaled our revenue estimates upwards on account of revenue growth acceleration and strong deal flows, the near-term margin outlook remains subdued. Given the strong top line performance, there is an upward risk to margin performance, which can be reviewed on sustained improvement in performance,” says Pratish Krishnan, IT analyst at Antique Stock Broking.
Q2: Mixed show
For the second quarter of CY14, Hexaware’s dollar revenues grew 6.3 per cent sequentially to $102 million (Rs 610 crore) . The growth was higher than expectations of three to four per cent top-line growth and was driven by 3.5 per cent volume growth and 2.5 per cent realisation gains. Shift towards higher onsite revenues (up 10 per cent sequentially) was the key reason for the uptick in realisations. While revenue growth was broad-based across geographies, verticals and service lines, a 250 basis points sequential contraction in margin (to 16.7 per cent) was the key negative.
Higher proportion of onsite revenues, 210 basis points dip in utilisation rate to 70.8 per cent and 210 basis points sequential increase in selling, general and administrative expenses (SG&A) to 19.6 per cent of revenues dragged the margins down. Higher visa and marketing costs, along with additional expenditure on engaging with a consulting firm, drove SG&A expenses. Net profit, too, came in much lower than expectations at Rs 77 crore. Revenues from top 6-10 clients as well as from top client posted good growth in the quarter.