1.
Hexaware Technologies
Margin troughed, Sales uptick likely; Upgrade to ‘Accumulate’
August 06, 2014
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Company Update
Shashi Bhusan
shashibhusan@plindia.com
+91‐22‐66322300
Hussain Kagzi
hussainkagzi@plindia.com
+91‐22‐66322242
Rating Accumulate
Price Rs141
Target Price Rs160
Implied Upside 13.5%
Sensex 25,908
Nifty 7,747
(Prices as on August 05, 2014)
Trading data
Market Cap. (Rs bn) 41.7
Shares o/s (m) 296.5
3M Avg. Daily value (Rs m) 474.8
Major shareholders
Promoters 63.83%
Foreign 15.68%
Domestic Inst. 2.19%
Public & Other 18.30%
Stock Performance
(%) 1M 6M 12M
Absolute (9.4) 5.0 18.3
Relative (9.2) (22.9) (16.7)
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2014 11.5 10.9 4.8
2015 14.3 13.2 8.6
Price Performance (RIC: HEXT.BO, BB: HEXW IN)
Source: Bloomberg
0
50
100
150
200
Aug‐13
Oct‐13
Dec‐13
Feb‐14
Apr‐14
Jun‐14
Aug‐14
(Rs)
We upgrade Hexaware Technologies (HEXW) to “Accumulate” from “Reduce” as our
long‐standing hypothesis of margin reset with moderating growth played out in
Q2CY14. We see the benefits of investments to flow‐in earlier than consensus
expectation as demand environment remains healthy. We see bottoming‐out of the
consensus expectations.
 Margin expectation bottomed out, improvement likely: In conjunction with our
hypothesis over the last two years about stretched levers and under‐investment
in business that resulted in margin improvement, margin reset happened over
the last three quarters as EBITDA margins eroded by 713bps. The management
started making investment in the business as they are eyeing for growth in
improved environment. We see headwinds in Q3CY14 due to wage hike and cost
associated with “Consultant Fees”. However, we expect EBITDA margin to
bottom‐out in Q3CY14 (@ 16%) with steady improvement in CY15.
 Growth momentum to improve, accelerate in CY15: According to the
management, revenue growth in H2CY14 is likely to remain sustained. HEXW is
chasing three large deals and initiating two new sales engagements (early stage
of discussion). The deal pipeline has witnessed steady improvement during the
quarter. Growth is likely to be strong on the back of new deal wins. However,
we see improving revenue momentum to only yield high single digit revenue
growth in USD terms in CY14, but mid‐teens growth in CY15 (PLe: 15.9%,
implying CQGR: 3.5%).
 Revising CY14E and CY15E estimates upward: We revise our estimates upward
for revenue and margin assumptions of CY14E and CY15E.
 Valuation & Recommendation – Upgrade to “Accumulate” with a revised TP of
Rs160: We see margin expectation of consensus to bottom‐out in Q3CY14.
However, we see steady improvement in margin thereon, with revenue
momentum seeing acceleration in CY15 to mid‐teens. We revise our multiple to
11x from 9x as company sustained healthy cash conversion and dividend
payout. We upgrade to “Accumulate”, with a revised TP of Rs160 (from Rs120).
Key financials (Y/e December) 2012 2013 2014E 2015E
Revenues (Rs m) 19,482 22,854 24,874 28,609
Growth (%) 34.3 17.3 8.8 15.0
EBITDA (Rs m) 4,074 5,124 4,291 5,344
PAT (Rs m) 3,276 3,792 3,435 4,285
EPS (Rs) 11.0 12.6 11.5 14.3
Growth (%) 21.4 14.5 (9.4) 24.8
Net DPS (Rs) 6.6 9.9 5.7 5.9
Profitability & Valuation 2012 2013 2014E 2015E
EBITDA margin (%) 20.9 22.4 17.3 18.7
RoE (%) 29.5 31.6 26.7 28.6
RoCE (%) 29.4 31.4 26.7 28.6
EV / sales (x) 2.0 1.7 1.6 1.3
EV / EBITDA (x) 9.8 7.6 9.1 7.0
PE (x) 12.7 11.1 12.3 9.8
P / BV (x) 3.5 3.5 3.1 2.6
Net dividend yield (%) 4.7 7.1 4.0 4.2
Source: Company Data; PL Research

2.
August 06, 2014 2
Hexaware Technologies
Exhibit 1: Revising estimates for CY14E & CY15E downwards
New Old Revision Consensus Variance
CY14E CY15E CY14E CY15E CY14E CY15E CY14E CY15E CY14E CY15E
Revenue ($ m) 416.3 485.2 416.3 467.1 0.0% 3.9% 417.72 475.80 ‐0.3% 2.0%
Revenue (Rs m) 24,874 28,627 24,874 27,559 0.0% 3.9% 24959 28072 ‐0.3% 2.0%
EBITDA Margin 17.3% 18.4% 17.0% 17.0% 23 bps 139 bps 18.0% 18.6% ‐78 bps ‐22 bps
EPS 11.42 14.05 11.27 12.54 1.3% 12.0% 10.93 13.15 4.5% 6.8%
Target Price 160 120 33.3% 143 11.8%
Source: Bloomberg, PL Research
Exhibit 2: EBITDA reset is in‐line with our expectation – Factoring‐in improvement
14%
16%
18%
20%
22%
24%
‐5%
‐2%
1%
4%
7% Q1CY11
Q2CY11
Q3CY11
Q4CY11
Q1CY12
Q2CY12
Q3CY12
Q4CY12
Q1CY13
Q2CY13
Q3CY13
Q4CY13
Q1CY14
Q2CY14
Q3CY14E
Q4CY14E
CY15E*
Revs (QoQ gr.) SG&A (% of revs) (RHS) EBITDA Margin (RHS)
Source: Company Data, PL Research, * Revenue growth is taken at CQGR (PLe)
Exhibit 3: Onsite ramp‐up: To accelerate offshore growth
‐6%
‐2%
2%
6%
10%
14%
Q1CY11
Q2CY11
Q3CY11
Q4CY11
Q1CY12
Q2CY12
Q3CY12
Q4CY12
Q1CY13
Q2CY13
Q3CY13
Q4CY13
Q1CY14
Q2CY14
Onsite Revs gr. Offshore Revs gr.
Source: Company Data, PL Research

3.
August 06, 2014 3
Hexaware Technologies
Exhibit 4: Sustaining cash flow at healthy level despite volatile earnings
‐48.0%
‐23.0%
2.0%
27.0%
52.0%
77.0%
102.0%
127.0%
‐56%
‐16%
24%
64%
104%
144%
184%
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
CFO/PAT FCF/EBITDA (RHS)
Source: Company Data, PL Research
Exhibit 5: Dividend payout ahead of industry average
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
CY08 CY09 CY10 CY11 CY12 CY13
Dividend Payout Ratio
Source: Company Data, PL Research
Exhibit 6: PER Chart
6.5x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Aug‐08
Dec‐08
May‐09
Sep‐09
Jan‐10
Jun‐10
Nov‐10
Mar‐11
Aug‐11
Dec‐11
May‐12
Sep‐12
Jan‐13
Jun‐13
Nov‐13
Mar‐14
Aug‐14
1‐Yr Forward PER Average PER
Source: Company Data, Bloomberg, PL Research

4.
August 06, 2014 4
Hexaware Technologies
Income Statement (Rs m)
Y/e December 2012 2013 2014E 2015E
Net Revenue 19,482 22,854 24,874 28,609
Software Dev. Exp. 11,846 13,826 15,818 17,964
Gross Profit 7,636 9,028 9,056 10,646
Employee Cost — — — —
Other Expenses 3,562 3,904 4,764 5,302
EBITDA 4,074 5,124 4,291 5,344
Depr. & Amortization 324 386 443 497
Net Interest — — — —
Other Income 290 58 555 647
Profit before Tax 4,040 4,796 4,403 5,493
Total Tax 764 1,004 969 1,209
Profit after Tax 3,276 3,792 3,435 4,285
Ex‐Od items / Min. Int. — — — —
Adj. PAT 3,276 3,792 3,435 4,285
Avg. Shares O/S (m) 296.5 299.9 299.9 299.9
EPS (Rs.) 11.0 12.6 11.5 14.3
Cash Flow Abstract (Rs m)
Y/e December 2012 2013 2014E 2015E
C/F from Operations 2,199 3,358 2,653 4,343
C/F from Investing (2,484) (1,162) (871) (1,001)
C/F from Financing (1,897) (1,255) (1,577) (1,770)
Inc. / Dec. in Cash (2,182) 941 205 1,572
Opening Cash 4,132 1,951 2,892 3,097
Closing Cash 1,951 2,892 3,097 4,669
FCFF 1,915 5,780 1,783 3,342
FCFE 1,993 5,711 1,783 3,342
Key Financial Metrics
Y/e December 2012 2013 2014E 2015E
Growth
Revenue (%) 34.3 17.3 8.8 15.0
EBITDA (%) 53.9 25.8 (16.2) 24.5
PAT (%) 22.7 15.7 (9.4) 24.8
EPS (%) 21.4 14.5 (9.4) 24.8
Profitability
EBITDA Margin (%) 20.9 22.4 17.3 18.7
PAT Margin (%) 16.8 16.6 13.8 15.0
RoCE (%) 29.4 31.4 26.7 28.6
RoE (%) 29.5 31.6 26.7 28.6
Balance Sheet
Net Debt : Equity (0.2) (0.3) (0.2) (0.3)
Net Wrkng Cap. (days) — — — —
Valuation
PER (x) 12.7 11.1 12.3 9.8
P / B (x) 3.5 3.5 3.1 2.6
EV / EBITDA (x) 9.8 7.6 9.1 7.0
EV / Sales (x) 2.0 1.7 1.6 1.3
Earnings Quality
Eff. Tax Rate 18.9 20.9 22.0 22.0
Other Inc / PBT 7.2 1.2 12.6 11.8
Eff. Depr. Rate (%) 5.0 5.3 5.4 5.4
FCFE / PAT 60.8 150.6 51.9 78.0
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e December 2012 2013 2014E 2015E
Shareholder's Funds 12,038 11,992 13,731 16,246
Total Debt 78 9 9 9
Other Liabilities 396 480 480 480
Total Liabilities 12,512 12,482 14,220 16,735
Net Fixed Assets 5,199 5,371 5,798 6,302
Goodwill — — — —
Investments 2,354 3,383 3,383 3,383
Net Current Assets 3,496 2,034 3,345 5,356
Cash & Equivalents 1,969 3,011 3,097 4,669
Other Current Assets 4,799 4,853 5,969 7,267
Current Liabilities 3,272 5,830 5,721 6,580
Other Assets 1,462 1,695 1,695 1,695
Total Assets 12,512 12,482 14,220 16,735
Quarterly Financials (Rs m)
Y/e December Q3CY13 Q4CY13 Q1CY14 Q2CY14
Net Revenue 6,211 6,200 5,889 6,104
EBITDA 1,478 1,394 1,133 1,017
% of revenue 23.8 22.5 19.2 16.7
Depr. & Amortization 98 101 108 108
Net Interest — — — —
Other Income (120) (2) (50) 173
Profit before Tax 1,260 1,291 975 1,082
Total Tax 272 259 272 227
Profit after Tax 988 1,032 703 855
Adj. PAT 988 1,032 703 855
Key Operating Metrics
Y/e December 2012 2013 2014E 2015E
Total Technical Billed (Headcount) 8,371 — — —
Onsite Realization ($/hr) 73.8 72.9 72.1 75.0
Offshore Realization ($/hr) 23.0 23.0 22.7 23.6
Software Dev. Exp. (% of Sales) 60.8 60.5 63.6 62.8
Sales & Mktg. (% of Sales) 18.3 17.1 19.2 18.5
Currency (Re/$) 53 59 60 59
Revenue (US$ m) 364 389 416 485
Source: Company Data, PL Research.

5.
August 06, 2014 5
Hexaware Technologies
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage
31.8%
49.1%
19.1%
0.0%
0%
10%
20%
30%
40%
50%
60%
BUY Accumulate Reduce Sell
% of Total Coverage
PL’s Recommendation Nomenclature
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
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