We downgrade Hexaware Technologies (Hexaware) to ‘reduce’ (earlier 'neutral') and bring our target price to R135 (from R140) as growth and margin outlook weakens. Even after an 11% fall after the results, we find Hexaware expensive at 12x FY15f EPS (versus 9x historical average) given there has been no growth in EPS over FY13-15f, and only a 7% dollar revenue CAGR on our new estimates, which is half the tier-1 IT average. This is despite building in improvements in growth/margins over Q2-Q4, in line with management indications.
Our target price is based on 10x 1-year forward EPS (up to year-end March 2016) of R13.2. The 10x multiple is at the lower end of the 9-13x range we use to value Tier-2 IT companies, given muted earnings growth expectations. We prefer HCL Technologies and Tech Mahindra (both ‘buy’) available at a marginal premium to Hexaware despite better revenue/EPS growth. We remain positive on sector demand and believe the declines for Hexaware at a majority of its top-10 clients (~50% of revenue) are company-specific issues.
Hexaware's dollar revenue fell 4.3% q-o-q (versus estimates of 1.4% q-o-q growth) and ebitda margin was down 320 bps q-o-q (versus estimates of a 60 bps fall), largely driven by revenue at top-10 clients falling 9.2% q-o-q.