1QCY2012 Result Update | IT

April 27, 2012

Hexaware
Performance highlights
Y/E December (` cr) Net revenue EBITDA EBITDA margin (%) PAT* 1QCY12 438 98 22.4 88 4QCY11 432 99 23.0 88 % chg (qoq) 1.5 (1.2) (61)bp 0.2 1QCY11 319 46 14.3 54 % chg (yoy) 37.6 115.8 812bp 64.5

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 3,792 1.1 134/61 263,827 2 17,134 5,191 HEXT.BO HEXW@IN

`130 -

Source: Company, Angel Research; Note: *Excluding exceptional item

For 1QCY2012, Hexaware reported a healthy set of results. Major highlights of the results were whopping 6.6% qoq volume growth even in a seasonally soft quarter for IT companies. Hexaware has been outperforming in the mid-cap space since eight quarters by reporting a scorching 7.7% CQGR. Management has been outperforming its guidance every quarter and has maintained CY2012 yoy revenue growth guidance of at least 20%. We expect the company to continue its revenue growth on the back of increasing traction for enterprise services as well as continue its operational exuberance. We remain Neutral on the stock. Quarterly highlights: For 1QCY2012, Hexaware reported USD revenue of US$88mn, up 4.7% qoq, led by 6.6% qoq volume growth. In INR terms, revenue came in at `438cr, up 1.5% qoq. The companys EBITDA and EBIT margins declined by 61bp and 77bp qoq to 22.4% and 20.8%, respectively, majorly due to qoq INR appreciation against USD. PAT for the quarter stood flat qoq to `88cr. Outlook and valuation: Hexaware signed two deals during 4QFY2012, each worth US$10mn plus. Also, management indicated that it is in the final stages of signing two large deals each worth US$25mn plus. Management intends to hire 1,500 net employees in CY2012 with 600-700 of them being freshers. Management has maintained the companys CY2012 yoy revenue growth guidance of at least 20% i.e., above US$370mn. We expect USD and INR revenue to post a scorching 18.1% and 20.5% CAGR over CY201012E, respectively. Hexaware has adequate levers to expand its margins such as strong volume growth, improvement in utilization level, broadening of the employee pyramid and rationalizing SGA costs which can elevate its EBITDA margin to 19.0% for CY2012 from 18.2% in CY2011. Thus, we expect EBITDA and PAT to post a CAGR of 21.7% and 9.5%, respectively. We value the company at 12x CY2013E EPS of `10.7, which gives us a target price of `128. The stock price has run up significantly and we see limited upside from current levels. We maintain our Neutral rating on the stock. Key financials (Indian GAAP, Consolidated)
Y/E December (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`)* P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) CY2010 1,055 1.5 85 (36.4) 8.9 2.9 45.2 3.8 10.9 6.9 3.2 35.6 CY2011 1,451 37.6 267 212.9 18.2 8.9 14.6 3.7 26.3 23.6 2.3 12.6 CY2012E 1,821 25.5 295 10.4 19.0 9.8 13.2 3.1 23.7 25.4 1.8 9.5 CY2013E 2,105 15.6 321 8.9 18.6 10.7 12.1 2.7 22.4 24.9 1.5 8.1

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 28.0 9.6 42.1 20.4

Abs. (%) Sensex Hexaware

3m (0.6) 57.7

1yr (11.9) 82.8

3yr 50.7 709.0

Ankita Somani
+91 22 39357800 Ext: 6819 [email protected]

Source: Company, Angel Research; Note: *Excluding exceptional item

Please refer to important disclosures at the end of this report

Hexaware | 1QCY2012 Result Update

Exhibit 1: 1QCY2012 performance (Indian GAAP, Consolidated)

Y/E December (` cr) Revenue Direct costs Gross profit SG&A expenses EBITDA Dep. and amortization EBIT Other income Forex gain PBT Tax PAT Exceptional item Final PAT Diluted EPS* Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%) 1QCY12 438 257 181 83 98 7 91 11 3 105 17 88 88 2.9 41.3 22.4 20.8 19.6 4QCY11 432 256 176 76 99 6 93 12 (5) 99 11 88 88 2.9 40.7 23.0 21.6 20.1 0.2 (0.1) 59bp (61)bp (77)bp (58)bp 5.6 48.6 0.2 % chg (qoq) 1.5 0.5 3.0 8.4 (1.2) 12.7 (2.1) 1QCY11 319 200 119 73 46 6 39 9 10 58 4 54 54 1.8 37.3 14.3 12.3 15.9 64.5 62.4 400bp 812bp 843bp 362bp 80.4 275.0 64.5 % chg (yoy) 37.6 28.8 52.4 13.0 115.8 15.2 131.6 CY2011 1,451 894 557 292 265 25 240 43 25 308 41 267 267 8.9 38.4 18.2 16.5 17.6 CY2010 1,055 692 363 269 94 24 70 50 (25) 95 9 85 22 108 2.9 34.4 8.9 6.6 7.9 147.8 210.5 395bp 936bp 994bp 968bp 225.4 341.5 212.9 % chg (yoy) 37.6 29.3 53.3 8.4 182.4 2.5 244.9

Source: Company, Angel Research; Note: * Excluding exceptional item

Exhibit 2: Actual vs. Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 438 22.4 88

Estimate 440 21.6 77

% Var (0.3) 79bp 14.5

Stellar performance
For 1QCY2012, Hexaware reported healthy USD revenue growth of 4.7% qoq, with revenue coming at US$88mn, primarily led by 6.6% qoq volume growth. In INR terms, revenue came in at `438cr, up merely 1.5% qoq, impacted by qoq INR appreciation against USD in 1QCY2012. During the quarter, the company reported a 1.2% qoq increase in onsite bill rates to US$73.90/hour from US$73.01/hour in 4QCY2011. Offshore billing rates stood almost flat qoq at US$22.9/hour. Going ahead, the company expects bill rates to remain stable.

April 27, 2012

Hexaware | 1QCY2012 Result Update

Exhibit 3: Trend in revenue growth (qoq)

90 85 80 84.1 6.2 5.7 4.9 70.4 74.8 5.8 78.8 5.3 4.8 6.7 6.6 9.2 88.0 10 9 8 7

(US$ mn)

70 65 60

4.7

5 4 3 2

1QCY11 Revenue (US$ mn)

2QCY11

3QCY11

4QCY11

1QCY12

Revenue growth - qoq (%)

Volume growth - qoq (%)

Source: Company, Angel Research

Exhibit 4: Trend in billing rates

80 70 60 72.00 72.00 72.50 73.01 73.90

(US$/hr)

50 40 30 20 10 1QCY11 2QCY11 Onsite 3QCY11 4QCY11 Offshore 1QCY12 22.20 22.50 23.00 23.00 22.90

Source: Company, Angel Research

Service vertical wise, the companys growth was broad-based. Growth was led by business intelligence (BI) and analytics (contributed 12.5% to revenue), revenue from which grew by 24.6% qoq. Hexawares anchor service vertical, application development and maintenance (ADM) (contributed 38.9% to revenue) reported decent 2.6% qoq growth in revenue. Revenue from other service verticals such as enterprise solutions and testing grew by 1.5% and 1.8% qoq, respectively. Going forward, management indicated that it is witnessing strong traction for services such as enterprise solutions, BI and infrastructure management services.

April 27, 2012

(%)

75

Hexaware | 1QCY2012 Result Update

Exhibit 5: Growth trend in service verticals

Service verticals ADM Enterprise solutions Testing BI and analytics BPO Others
Source: Company, Angel Research

% to revenue 38.9 28.9 10.5 12.5 4.7 4.5

% chg (qoq) 2.6 1.5 1.8 24.6 (3.5) 14.9

% chg (yoy) 25.0 14.3 41.2 57.9 3.1 22.3

Industry segment wise, travel and transportation and healthcare and insurance led the companys growth by posting 11.2% and 10.4% qoq growth in revenue, respectively. Revenue from the banking and capital market industry segment remained almost flat qoq.

Exhibit 6: Growth trend in industry segments

Industry segments Banking and capital market Healthcare and insurance % to revenue 27.3 17.3 22.0 33.4 % chg (qoq) 0.3 10.4 11.2 1.6 % chg (yoy) 19.3 80.2 10.9 20.7

Travel and transportation

Emerging segments
Source: Company, Angel Research

Geography wise, growth was again led by revenue from Europe, which reported 7.9% qoq growth. Revenue from America grew by 3.7% qoq, while revenue from Asia Pacific geography remained flat qoq.

Exhibit 7: Growth trend in geographies

% to revenue Americas Europe Asia Pacific
Source: Company, Angel Research

% chg (qoq) 3.7 7.9 0.1

% chg (yoy) 20.9 32.6 35.3

63.8 29.6 6.6

Hiring continues
During 1QCY2012, Hexaware added 307 net employees, out of which 225 were freshers. Of the total hiring done, 298 employees were added in the technical employee base, taking the total technical employee base to 7,925. Management intends to hire 1,500 net employees in CY2012 with 600-700 of them being freshers and management indicated that the company is on track to meet its guidance. Attrition rate during 1QCY2012 declined to 11.0% from 13.9% in 4QCY2011.

April 27, 2012

Hexaware | 1QCY2012 Result Update

Exhibit 8: Employee metrics

Particulars Technical Onsite Offshore Total technical employees Net technical emp. addition Net addition (overall) Total employees Attrition (%)
Source: Company, Angel Research

1QCY11 1,333 4,725 6,058 159 153 6,664 19.6

2QCY11 1,454 5,334 6,788 731 755 7,419 18.0

3QCY11 1,527 5,960 7,486 698 745 8,164 14.7

4QCY11 1,564 6,063 7,627 140 153 8,317 13.9

1QCY12 1,595 6,330 7,925 299 307 8,624 11.0

Utilization level, including trainees, dipped by 110bp qoq to 68.6% in 1QCY2012 from 69.7% in 4QCY2011 because of addition of freshers in the system. Increasing utilization from current levels will be an important margin lever for the company going forward, as trainees would turn billable.

Exhibit 9: Utilization trend

73 72 71 72.7 71.4 70.6 69.4 69.7 68.6

(%)

70 69 68 67

4QCY10

1QCY11

2QCY11

3QCY11

4QCY11

1QCY12

Utilisation - incl. trainees (%)

Source: Company, Angel Research

Margins decline
During 1QCY2012, the company witnessed a 61bp and 77bp qoq decline in its EBITDA and EBIT margins to 22.4% and 20.8%, respectively, largely because of INR appreciation. Factors aiding margins were: 1) 45bp qoq positive impact from offshore effort shift, 2) 20bp positive impact from better billing rates, 3) 125bp positive impact derived from improvement in employee pyramid, 4) 75bp negative impact due to INR appreciation against USD, 5) 35bp negative impact due to decline in utilization level and 6) 120bp qoq negative impact due to increased SG&A costs. Going ahead, Hexaware expects its margin to further expand by using levers such as 1) rationalizing employee pyramid, 2) increasing utilization level, 3) lowering SG&A expenses and 4) shifting the revenue mix offshore.

April 27, 2012

Hexaware | 1QCY2012 Result Update

Exhibit 10: Margin profile

45 40 35 30 37.3 36.6 38.2 40.7 41.3

(%)

25 20 15 10 5 1QCY11 2QCY11 14.3 12.3 13.5 15.3

23.0 18.7 21.6 17.0

22.4 20.8

3QCY11 EBITDA margin

4QCY11

1QCY12

Gross margin
Source: Company, Angel Research

EBIT margin

Client pyramid
During 1QCY2012, Hexaware added 12 new clients one in travel and transportation, three in banking and one in healthcare and insurance industry segment. From a service vertical perspective, six clients were added in enterprise solutions, one in testing, one in BI and analytics and one in infrastructure management services. Of these 12 new client additions, five were added from the American geography, while four were from Europe and three from Asia Pacific. The company added one new client in the US$10mn-20mn plus revenue bracket and two in the US$1mn-5mn revenue bracket. Active client base of the company increased to 201 in 1QCY2012 from 192 in 4QCY2011.

Exhibit 11: Client metrics

No. of clients US$1mn5mn US$5mn10mn US$10mn20mn US$20mn plus Total clients billed Clients added
Source: Company, Angel Research

1QCY11 39 6 2 2 180 10

2QCY11 40 6 2 2 190 14

3QCY11 39 8 1 3 194 12

4QCY11 40 7 2 3 192 15

1QCY12 42 7 3 3 201 12

Outlook and valuation

Hexawares anchor service verticals, enterprise solutions (~29% of revenue) and business intelligence (~12% of revenue) are firing up growth cylinders for the company. Hexaware managed to outperform the entire IT pack with a 7.7% CQGR in revenue and 22% in EBITDA over the last eight quarters. The company signed two deals during 4QFY2012, each worth US$10mn plus. Also, management indicated that it is in the final stages of signing two large deals each worth US$25mn plus. Management intends to hire 1,500 net employees in CY2012 with 600-700 of them being freshers. Management has been outperforming its guidance every quarter and has maintained the companys CY2012 yoy revenue growth guidance
April 27, 2012

Hexaware | 1QCY2012 Result Update

of at least 20% i.e., above US$370mn. This seems easily achievable by the company given the revenue visibility on account of six large deals signed in the past few quarters. We expect the company to continue its revenue growth on the back of increasing traction for enterprise services as well as continue its operational exuberance. Thus, we expect the companys niche focus in enterprise solutions and business intelligence to play out strongly. Further, we expect USD and INR revenue to post a scorching 18.1% and 20.5% CAGR over CY201012E, respectively. Hexaware has adequate levers to expand its margins such as 1) strong volume growth and improvement in utilization level (currently at 68.6%), 2) broadening of the employee pyramid, 3) ability to grow even with rationalizing SGA costs and 4) enterprise solutions and business intelligence, the companys strong growth drivers, offering improvement in business mix and leading to increased revenue productivity. We expect EBITDA margin to improve to 19.0% for CY2012 from 18.2% in CY2011. Thus, we expect EBITDA and PAT to post a CAGR of 21.7% and 9.5%, respectively. At the CMP, the stock is trading at PE of 12.1x CY2013E EPS of `10.7. We value the company at 12x CY2013E EPS of `10.7, which gives us a target price of `128. The stock price has run up significantly and we see limited upside from current levels. We maintain our Neutral rating on the stock.

Exhibit 12: Key assumptions

Particulars Revenue growth USD terms (%) USD-INR rate Revenue growth INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

CY2012 20.2 49.2 25.5 19.0 19.5 10.1

CY2013 16.0 49.0 15.6 18.6 22.0 9.0

Exhibit 13: Change in estimates

CY2012E Parameter (` cr) Net revenue EBITDA Other income PBT Tax PAT Earlier Estimates 1,829 343 47 347 69 278 Revised estimates 1,821 346 46 366 71 295 Variation (%) (0.4) 1.1 (2.1) 5.4 3.1 6.0 Earlier estimates 2,092 391 53 404 88 316 CY2013E Revised estimates 2,105 392 52 411 90 321 Variation (%) 0.6 0.3 (1.9) 1.8 2.9 1.5

Source: Company, Angel Research

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Hexaware | 1QCY2012 Result Update

Exhibit 14: One-year forward PE(x) chart

180 160 140 120 100 80 60 40 20 0

(`)

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

May-06

May-07

May-08

May-09

May-10

May-11

Sep-11

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Price
Source: Company, Angel Research

16x

13x

9x

5x

2x

Exhibit 15: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco Accumulate Neutral Buy Accumulate Buy Buy Neutral Buy Buy Neutral Accumulate Accumulate Accumulate CMP (`) 511 130 2,390 160 85 75 579 366 43 346 1,205 696 406 Tgt Price (`) 560 2,792 177 98 89 433 61 1,276 750 430 Upside (%) 9.7 16.8 10.3 15.2 18.1 18.2 41.0 5.9 7.7 6.0 FY2014 EBITDA (%) 17.4 18.6 30.6 16.6 14.9 15.0 15.5 17.9 16.9 22.4 28.7 15.7 19.9 FY2014E P/E (x) 11.9 12.1 13.7 8.6 7.8 9.1 9.9 8.9 4.7 8.6 17.0 8.0 14.2 FY2011-14E EPS CAGR (%) 17.0 55.0 13.4 13.9 (1.4) 25.3 32.9 1.7 18.0 4.7 16.8 20.8 9.7 FY2014E RoCE (%) 20.4 24.9 22.8 16.9 20.0 11.4 19.8 14.1 11.5 17.0 28.8 12.9 13.9 FY2014E RoE (%) 21.3 22.4 20.8 13.2 18.0 13.0 17.0 13.7 19.0 14.5 27.7 18.0 18.3

Source: Company, Angel Research; Note: ^Valued on SOTP basis

April 27, 2012

Jan-12

Hexaware | 1QCY2012 Result Update

Profit and loss statement (Indian GAAP, Consolidated)

Y/E December (` cr) Revenues Direct costs Gross profit % to revenues SG&A expenses % to revenues EBITDA % to revenues Depreciation and amortization % to revenues EBIT % to revenues Other income Forex gain PBT Tax % of PBT PAT Exceptional item Adj. PAT EPS (`) - diluted CY2009 1,039 564 474 45.7 272 26.2 202 19.5 27 2.6 175 16.9 31 (62) 145 10 7.2 134 134 4.6 CY2010 1,055 692 363 34.4 269 25.5 94 8.9 24 2.3 70 6.6 50 (25) 95 9 9.8 85 22 108 2.9 CY2011 1,451 894 557 38.4 292 20.1 265 18.2 25 1.7 240 16.5 43 25 308 41 13.2 267 267 8.9 CY2012E 1,821 1,146 675 37.0 328 18.0 346 19.0 31 1.7 316 17.3 46 5 366 71 19.5 295 295 9.8 CY2013E 2,105 1,342 763 36.2 371 17.6 392 18.6 36 1.7 356 16.9 52 3 411 90 22.0 321 321 10.7

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Hexaware | 1QCY2012 Result Update

Balance sheet (Indian GAAP, Consolidated)

Y/E December (` cr) Liabilities Share capital Reserves Forex MTM Total shareholders' funds Borrowings Total liabilities Assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Current assets Cash and cash equivalent Debtors Current assets - forex MTM Others Total current assets Current liability - forex MTM Other current liabilities Deferred tax Total assets 426 153 111 690 44 227 11 866 475 192 21 142 830 255 17 1,000 461 299 195 955 88 345 16 1,016 517 369 289 1,175 26 424 16 1,244 633 427 337 1,397 15 489 20 1,429 576 140 436 560 152 408 648 170 479 704 200 504 752 236 516 29 861 (41) 850 16 866 29 934 26 989 11 1,000 59 1,061 (104) 1,016 1,016 59 1,186 1,244 1,244 59 1,371 1,429 1,429 CY2009 CY2010 CY2011 CY2012E CY2013E

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Hexaware | 1QCY2012 Result Update

Cash flow statement (Indian GAAP, Consolidated)

Y/E December (` cr) Pre-tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in current assets Inc/(dec) in current liabilities Net trade working capital Cash flow from operating activities (Inc)/dec in fixed assets (Inc)/dec in deferred tax asset Inc/(dec) in other non-current liabilities Cash flow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cash flow from financing activities Cash generated/(utilized) Cash at start of the year Cash at end of the year CY2009 CY2010 CY2011 CY2012E CY2013E 175 27 202 (31) 172 10 161 46 (100) (54) 107 (13) (3) 83 67 (3) (6) (24) (33) 141 285 426 70 24 94 25 119 9 109 (91) (16) (107) 2 4 (6) 67 64 (5) 39 (51) (17) 49 426 475 240 25 265 68 332 41 292 (139) 178 40 331 (95) 1 (130) (224) (11) 26 (136) (122) (15) 475 461 316 31 346 50 397 71 325 (164) 17 (147) 179 (56) 104 48 (170) (170) 56 461 517 356 36 392 55 447 90 357 (106) 54 (52) 305 (48) (4) (52) (136) (136) 117 517 633

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Hexaware | 1QCY2012 Result Update

Key ratios
Y/E December Valuation ratio (x) P/E P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios(x) Asset turnover (fixed assets) Debtor days 2.4 54 2.6 66 3.0 75 3.6 74 4.1 74 20.2 39.8 15.8 6.9 13.2 10.9 23.6 43.2 26.3 25.4 43.4 23.7 24.9 44.8 22.4 0.9 0.8 0.2 1.2 1.0 15.1 0.9 1.4 0.1 1.1 1.0 8.9 0.9 1.3 0.2 1.4 0.9 23.8 0.8 1.2 0.2 1.5 1.0 23.7 0.8 1.2 0.2 1.5 1.0 22.4 4.6 5.5 0.7 29.1 2.9 4.5 1.5 33.8 8.9 10.0 4.7 34.7 9.8 11.1 5.8 42.5 10.7 12.2 4.7 48.9 28.5 23.6 4.5 0.5 3.3 16.7 3.9 45.2 28.8 3.8 1.1 3.2 35.6 3.3 14.6 13.0 3.7 3.6 2.3 12.6 3.3 13.2 11.7 3.1 4.5 1.8 9.5 2.6 12.1 10.6 2.7 3.6 1.5 8.1 2.2 CY2009 CY2010 CY2011 CY2012E CY2013E

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Hexaware | 1QCY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Hexaware No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 27, 2012

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