Stock Review: Hexaware Technologies

 

Sustained revenue momentum over the past few quarters, a surge in operating profit margin and strong revenue guidance for the next few quarters ring positive for the Mumbai-based IT and BPO services company Hexaware Technologies. The mid-tier IT firm's strong March quarter results suggest that business has recovered from the loss recorded during the downturn. Also, operating margins are back at pre-downturn levels reflecting operational stability.

FINANCIALS

Hexaware has posted healthy numbers for the past few quarters. During the March 2011 quarter, it reported a 6.3% sequential growth in revenues at 318 crore, driven by a 5% volume growth across verticals including BFSI, travel and transportation and other emerging segments. Enterprise allocation service and business intelligence and analytics segments grew nearly 13% each on a sequential basis. On the operational front, Hexaware recorded a huge 280 basis points sequential jump in its operating profit margin at 14.3% during the March quarter, which is the highest in the last five quarters. This was a result of reduced direct costs, improved realisations, offshore shift and higher utilisations. Higher sales and stability in operations led to a 36% jump in the company's bottom line at 54 crore. But margins are likely to remain flat going ahead, as it faces a wage hike. Also, given the nature of EAS business, not much work can be brought offshore acting as a further headwind.

GROWTH DRIVERS

The company has seen considerable traction in business from Europe and the US over the past two quarters. It has also made headway in the remote infrastructure management space by winning a three-year contract. With discretionary spends on the rise globally and significant traction in business, the company has revised its full- year guidance to $295 million, 27.5% over 2010. This seems to be conservative as it had sales of $70 million in the March quarter.

VALUATIONS

At the current market price of 66.5, the stock trades at 14.9 times its earnings for the trailing 12 months.