Hexaware Technologies Falls 3% Despite Strong Q2 Earnings

Hexaware Technologies, a Mumbai-based midcap IT firm, outperformed its larger peers such as TCS and Infosys by reporting a 5.5 per cent sequential growth in constant currency dollar revenue in the June quarter. TCS had earlier posted 3.5 per cent revenue growth, while Infosys grew by 4.4 per cent in the June quarter.

The beat came on a much lower base - Hexaware reported sales of $121.3 million, while TCS and Infosys clocked revenues of $4,036 million and $2,256 million in the June quarter.

Hexaware's operating or EBIT margin, however, dropped in the June quarter, and at 15.7 per cent, the company's margin was well below the margins posted by its bigger rivals.

In a note, Nomura said higher ESOP charges caused a margin dilution of around 90 basis points sequentially. Nearly 90 per cent of Hexaware's incremental revenues in the last twelve months came from onsite, which further depressed margins, the brokerage added.

"Net-net we think there is no blemish in the result, except for the growth being onsite-centric, which is lower margin," Nomura said.

R Srikrishna, CEO of Hexaware Technologies, said the company posted good performance in Europe. Hexaware Technologies saw an 8 per cent quarter-on-quarter revenue growth from Europe in the June quarter.

In rupee terms, Q2 revenues grew 8 per cent quarter-on-quarter to Rs 772.2 crore while net profit rose 18.6 per cent sequentially to Rs 98.9 crore.

Hexaware shares, which had surged over 7 per cent in the previous five sessions, came in for profit-taking today. Hexware shares ended 2.5 per cent lower at Rs 283.60.

On a year-to-date basis, Hexaware Technologies remains an outperformer, surging nearly 45 per cent. Nomura, however, has a "reduce" rating on Hexaware because the stock trades at 19 times its FY16 earnings per share estimates, which the brokerage says is costly.

Nomura's target price of Rs 188 is based on 12 times Hexaware's 1-year forward earnings per share (EPS) of Rs 15.6.