3QCY2011 Result Update | IT

October 20, 2011

Hexaware
Performance highlights
Y/E December (` cr) Net revenue EBITDA EBITDA margin (%) PAT* 3QCY11 366 69 18.7 65 2QCY11 334 51 15.3 60 % chg (qoq) 9.6 34.3 345bp 7.4 3QCY10 282 24 8.5 17 % chg (yoy) 29.9 185.9 1023bp 284.9

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 2,605 1.2 94/38 375,098 2 16,937 5,092 HEXT.BO HEXW@IN

`89 -

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

For 3QCY2011, Hexaware reported robust set of results. Major highlights of the results were whopping growth of 9.2% qoq and considerable operating margin expansion, despite wage hikes given to onsite employees during the quarter. Hexaware has been outperforming in the mid-cap space since a year by growing at a scorching 7.5% CQGR over 2QCY20103QCY2011. Management has been outperforming its guidance every quarter and has guided for at least 32% yoy revenue growth for CY2011. 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 recommend Neutral on the stock. Quarterly highlights: For 3QCY2011, Hexaware reported USD revenue of US$78.8mn, up 5.3% qoq. In INR terms, revenue came in at `366cr, up 9.6% qoq. The companys EBITDA and EBIT margins expanded by 345bp and 348bp qoq, despite wage hikes given to onsite employees during the quarter, on the back of stronger volume growth, lower SG&A expenses and INR depreciation against USD. PAT for the quarter stood at `65cr, up 7.4% qoq. Outlook and valuation: On the back of an improving deal pipeline, management has guided to grow the companys revenue in CY2011 by at least 32% i.e., above US$306mn, which seems easily achievable considering managements previous track record. Thus, we expect the companys niche focus in enterprise solutions and business intelligence (BI) to play out strongly. Further, we expect USD and INR revenue to grow at a scorching 24.4% and 25.2% CAGR over CY2010-12E, respectively. Also, Hexaware has adequate levers to expand its margins such as strong volume growth, improvement in utilization level, broadening of the employee pyramid and maintaining SGA at absolute levels which can elevate its EBITDA margin to 16.8% for CY2011 from 8.8% in CY2010. Thus, we expect EBITDA and PAT to grow at a whopping CAGR of 72.3% and 69.4%, respectively. We value the company at PE of 11x CY2012E EPS, which gives us a target price of `92. We recommend Neutral 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) CY2009 1,039 (9.8) 134 127.2 19.5 4.6 19.6 3.1 15.8 20.2 2.1 10.9 CY2010 1,055 1.5 85 (36.4) 8.9 2.9 31.0 2.6 10.9 6.9 2.0 22.9 CY2011E 1,412 33.9 243 185.0 16.8 8.1 11.0 2.3 21.7 18.0 1.5 9.1 CY2012E 1,653 17.1 245 0.8 16.8 8.2 10.9 2.0 18.8 18.1 1.2 7.3

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 28.2 7.4 42.9 21.5

Abs. (%) Sensex Hexaware

3m (8.5)

1yr (16.2)

3yr 60.9 610.8

19.0 112.5

Srishti Anand
+91 22 39357800 Ext: 6820 srishti.anand@angelbroking.com

Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com

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

Please refer to important disclosures at the end of this report

Hexaware | 3QCY2011 Result Update

Exhibit 1: 3QCY2011 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 (%) 3QCY11 366 226 140 71 69 6 62 12 4 78 14 65 65 2.2 38.2 18.7 17.0 16.9 2QCY11 334 212 122 71 51 6 45 10 16 72 12 60 60 2.0 36.6 15.3 13.5 16.7 7.4 7.4 156bp 345bp 348bp 23bp 9.0 17.2 7.4 % chg (qoq) 9.6 6.8 14.2 (0.1) 34.3 7.4 37.8 3QCY10 282 187 94 70 24 6 18 7 (8) 18 1 17 25 42 0.6 33.5 8.5 6.4 6.0 53.8 283.0 472bp 1023bp 1056bp 1095bp 342.7 1,450.0 284.9 % chg (yoy) 29.9 20.7 48.3 1.3 185.9 9.2 242.6 9MCY11 1,019 638 381 216 165 18 147 31 30 208 30 179 179 6.0 37.4 16.2 14.4 16.5 9MCY10 755 495 260 200 59 18 42 42 (34) 49 4 46 22 68 1.5 34.4 7.8 5.5 6.0 162.4 289.8 301bp 838bp 889bp 1055bp 321.8 702.1 291.1 % chg (yoy) 34.9 28.8 46.7 7.6 179.1 5.1 252.5

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 366 18.7 65

Estimate 361 15.7 57

% Var 1.5 304bp 13.6

Robust revenue growth

For 3QCY2011, Hexaware reported strong USD revenue growth of 5.3% qoq, with revenue coming at US$78.8mn, primarily led by whopping 9.2% qoq volume growth. The companys revenue was negatively impacted by 0.6% qoq due to cross-currency movement. In constant currency (CC) terms, revenue came in at US$79.2mn, up 5.9% qoq. In INR terms, revenue came in at `366cr, up 9.6% qoq higher growth as against USD revenue due to qoq INR depreciation against USD in 3QCY2011.

October 20, 2011

Hexaware | 3QCY2011 Result Update

Exhibit 3: Trend in revenue growth (qoq)

85 80 75 70 10.2 8.0 66.6 61.1 4.9 9.0 70.4 5.7 74.8 6.2 5.8 5.3 78.8 9.2 11.3 12 10 8

(US$ mn)

60 55 50 45 40

4 2 0

3QCY10 Revenue (US$ mn)

4QCY10

1QCY11

2QCY11

3QCY11

Revenue growth - qoq (%)

Volume growth - qoq (%)

Source: Company, Angel Research

During the quarter, the company reported a 2.2% and 0.7% qoq increase in offshore and onsite bill rates to US$23.0/hour and US$72.5/hour from US$22.5/hour and US$72.0/hour, respectively. Going ahead, the company expects bill rates to remain stable.

Exhibit 4: Trend in billing rates

80 70 60 71.20 71.22 72.00 72.00 72.50

(US$/hr)

50 40 30 20 10 3QCY10 4QCY10 Onsite 1QCY11 2QCY11 Offshore 3QCY11 21.50 21.87 22.20 22.50 23.00

Source: Company, Angel Research

Along with volume growth of 9.2% qoq, increased price realization aided USD revenue growth by 1.2% qoq. However, these gains were partially overshadowed by negative impacts from cross-currency movement and offshore effort shift of 0.6% and 4.5% qoq, respectively.

October 20, 2011

(%)

65

Hexaware | 3QCY2011 Result Update

Exhibit 5: Revenue drivers for 3QCY2011

10 8 6 4 5.3 9.2

(%)

2 0 (2) (4) (6) Volume (4.5) Business mix shift

1.2

(0.6)

Pricing

Cross currency

Total revenue growth

Source: Company, Angel Research

Service vertical wise, the companys growth was broad-based. The companys anchor service vertical, application development and maintenance (ADM) (contributed 40.5% to revenue) emerged as the primary growth driver for the company by reporting 8.8% qoq revenue growth. Discretionary services such as BI and analytics (contributed 9.6% to revenue) and enterprise solutions (contributed 30.5% to revenue) reported 2.2% and 2.7% qoq growth in revenue, respectively. Other services such as testing and BPO also reported decent revenue growth of 3.1% and 5.3% qoq, respectively. Going forward, management indicated that it is witnessing strong traction for services such as enterprise solutions, BI and data warehousing.

Exhibit 6: Growth trend in service verticals

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

% to revenue 40.5 30.5 9.2 9.6 5.7 4.5

% chg (qoq) 8.8 2.7 3.1 2.2 5.3 5.3

% chg (yoy) 17.9 33.3 62.5 47.4 11.4 48.8

Industry segment wise, BFSI led the companys growth by posting 10.2% qoq growth in revenue. On the other hand, revenue from the travel and transportation segment declined by 0.6% qoq.

Exhibit 7: Growth trend in industry segments

Industry segments BFSI Travel and transportation Emerging segments
Source: Company, Angel Research

% to revenue 34.4 23.2 42.4

% chg (qoq) 10.2 (0.6) 5.1

% chg (yoy) 25.0 21.1 37.4

October 20, 2011

Hexaware | 3QCY2011 Result Update

Geography wise, growth was again led by revenue from the Asia Pacific region, which reported whopping 13.6% qoq growth. The company added six new clients from this geography during the quarter. Americas, the major contributor to revenue, grew modestly by 2.7% qoq. Four new clients were added from Americas. From Europe, the company added two clients during the quarter.

Exhibit 8: Growth trend in geographies

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

% chg (qoq) 2.7 10.0 13.6

% chg (yoy) 24.5 32.2 67.9

64.7 28.4 6.9

Hiring spree persists

During 3QCY2011, Hexaware added 745 net employees, of which 698 were added in the technical employee base, taking the total technical employee base to 7,486. Of the total employee addition of 745, 280 were freshers. During 9MCY2011, the company has added 550 freshers and management intends to hire 200 more employees in 4QCY2011. Also, in terms of overall hiring, the company has already exceeded its guidance of 1,500 employees, as YTD Hexaware has added 1,653 employees.

Exhibit 9: Employee metrics

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

3QCY10 1,217 4,460 5,677 279 277 6,308 22.6

4QCY10 1,309 4,590 5,899 222 203 6,511 19.9

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

Utilization level, including trainees, dipped by 80bp qoq to 70.6% in 3QCY2011 from 71.4% in 2QCY2011 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.

October 20, 2011

Hexaware | 3QCY2011 Result Update

Exhibit 10: Utilization trend

73 72 71 72.7 71.4 70.6 69.4 68.5 68.0

(%)

70 69 68 67 2QCY10 3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

Utilisation - incl. trainees (%)

Source: Company, Angel Research

Margins enhance
During 3QCY2011, despite giving wage hike of 3% to onsite employees, the company managed to show stellar 345bp and 348bp qoq expansion in its EBITDA and EBIT margins to 18.7% and 17.0%, respectively, which is a commendable task. Margin movement was affected by 1) 115bp qoq positive impact from increased price realization, 2) 105bp qoq gain from INR depreciation against USD, 3) 75bp negative impact due to wage hike given to onsite employees, 4) 140bp qoq benefit from lower SG&A expense, 5) 15bp qoq negative impact due to unfavourable cross-currency movement and 6) 75bp qoq benefit from effort shift offshore. The companys gross margin also improved by 156bp qoq to 38.2%. 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.

Exhibit 11: Margin profile

40 35 30
(%)

37.3 33.5 34.5

36.6

38.2

25 20 15 10 5 6.4 3QCY10 8.5 9.3 4QCY10 Gross margin 1QCY11 EBITDA margin 2QCY11 EBIT margin 3QCY11 11.5 12.3 13.5 18.7 14.3 15.3 17.0

Source: Company, Angel Research

October 20, 2011

Hexaware | 3QCY2011 Result Update

Client pyramid
During 3QCY2011, Hexaware added 12 new clients three in travel and transportation and four in financial services. From a services-wise perspective, five clients were added in the enterprise solution space, one in testing, two in BI and analytics and one in BPO. These clients span across geographies. Total clients billed also increased to 194 from 190 in 2QCY2011. The company added one new client in the US$20mn plus revenue bracket; this was shifted from the US$10mn-20mn revenue bracket.

Exhibit 12: Client metrics

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

3QCY10 39 7 4 0 167 13

4QCY10 39 7 2 2 174 11

1QCY11 39 6 2 2 180 10

2QCY11 40 6 2 2 190 14

3QCY11 39 8 1 3 194 12

Outlook and valuation

Hexawares anchor service verticals, enterprise solutions (~31% of revenue) and business intelligence (~10% of revenue) is firing up growth cylinders for the company. The company managed to outperform the entire IT pack with a 7.5% CQGR over 2QCY20103QCY2011. Management has indicated its plan to hire 200 freshers in 4QCY2011, even on the back of addition of net 1,653 employees (of this, 550 were freshers) in 9MCY2011. On the back of an improving deal pipeline, management has guided to grow its revenue in CY2011 by at least 32% i.e., above US$306mn, which seems easily achievable. Going by managements guidance since the start of CY2009, the company, on an average, has always outperformed its quarterly revenue guidance by 4%. 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 grow at a scorching 24.4% and 25.2% 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 70.6%), 2) broadening of the employee pyramid (which currently has ~17% of the total employees with less than three years of experience), 3) ability to grow even with maintaining SGA at absolute levels, 4) enterprise solutions and business intelligence that are the companys strong growth drivers, offering improvement in business mix and leading to increased revenue productivity and 5) shifting more work offshore to elevate its EBITDA margin to 16.8% for CY2011 from 8.8% in CY2010. Thus, we expect EBITDA and PAT to grow at a CAGR of whopping 72.3% and 69.4%, respectively. At the CMP, the stock is trading at PE of 10.9x CY2012E EPS of `8.3 i.e., with a PEG ratio of 0.2x. Hence, we value the company at PE of 11x CY2012E EPS, which gives us a target price of `92. Owing to the recent run up in the stock price, we recommend Neutral on the stock

October 20, 2011

Hexaware | 3QCY2011 Result Update

Exhibit 13: Key assumptions

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

CY2011 32.3 46.2 33.9 16.8 15.2 182.8

CY2012 16.9 46.2 17.1 16.8 23.0 0.6

Exhibit 14: Change in estimates

FY2012E Parameter (` cr) Net revenue EBITDA Other income PBT Tax PAT Earlier Estimates 1,381 211 43 273 42 231 Revised estimates 1,412 238 44 287 44 243 Variation (%) 2.2 12.6 3.4 5.1 4.8 5.1 Earlier estimates 1,602 245 52 308 71 237 FY2013E Revised estimates 1,653 278 56 318 73 245 Variation (%) 3.2 13.4 6.1 3.3 3.3 3.3

Source: Company, Angel Research

Exhibit 15: One-year forward PE(x) chart

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

October 20, 2011

Hexaware | 3QCY2011 Result Update

Exhibit 16: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco Buy Neutral Neutral Accumulate Neutral Accumulate Buy Buy Buy Accumulate Buy Buy Accumulate CMP (`) 415 89 2,746 111 162 70 383 323 48 312 1,045 570 355 Tgt Price (`) 545 127 79 462 382 61 330 1,220 734 374 Upside (%) 31.3 14.1 12.9 20.6 18.4 28.4 5.8 16.8 28.8 5.5 Target P/E (x) 14.0 11.0 18.0 8.5 10.0 11.0 10.0 11.5 8.8 9.0 20.0 9.0 15.3 FY2013 EBITDA (%) 17.7 16.8 30.6 15.7 15.3 14.6 14.4 15.5 13.8 20.0 28.7 16.3 18.3 FY2013E P/E (x) 10.7 10.9 17.4 7.5 10.5 9.8 8.4 8.2 6.9 8.5 17.1 7.0 14.5 FY2011-13E EPS CAGR (%) 26.1 68.7 14.8 8.9 16.5 30.4 35.6 0.4 11.2 2.5 17.0 28.5 6.1 FY2013E RoCE (%) 20.6 18.1 24.0 15.0 18.7 10.8 18.6 13.4 12.4 15.8 29.8 13.6 12.9 FY2013E RoE (%) 22.4 18.8 22.5 12.4 16.4 13.5 16.5 14.5 16.6 14.8 30.9 20.2 18.7

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

October 20, 2011

Hexaware | 3QCY2011 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 Final PAT EPS 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 CY2011E 1,412 882 530 37.6 292 20.7 238 16.8 26 1.8 212 15.0 44 30 287 44 15.2 243 243 8.1 CY2012E 1,653 1,057 596 36.1 318 19.2 278 16.8 32 1.9 246 14.9 56 17 318 73 23.0 245 245 8.2

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Hexaware | 3QCY2011 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 1,000 512 226 22 226 986 263 25 1,180 629 260 22 289 1,201 304 24 1,361 576 140 436 560 152 408 610 178 432 650 210 440 29 861 (41) 850 16 866 29 934 26 989 11 1,000 59 1,062 1,120 60 1,180 59 1,242 1,301 60 1,361 CY2009 CY2010 CY2011E CY2012E

October 20, 2011

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Hexaware | 3QCY2011 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/(utilised) Cash at start of the year Cash at end of the year CY2009 175 27 202 (31) 172 10 161 46 (100) (54) 107 (13) (3) 83 67 (3) (6) (24) (33) 141 285 426 CY2010 70 24 94 25 119 9 109 (91) (16) (107) 2 4 (6) 67 64 (5) 39 (51) (17) 49 426 475 CY2011E 212 26 238 75 313 44 269 (119) 9 (110) 159 (50) (8) (26) (84) 49 30 (116) (37) 37 475 512 CY2012E 246 32 278 72 350 73 277 (98) 41 (57) 220 (40) 1 (39) (65) (65) 117 512 629

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Hexaware | 3QCY2011 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 63 2.6 60 3.3 59 3.8 58 20.2 39.8 15.8 6.9 13.2 10.9 18.0 31.7 21.7 18.1 33.6 18.8 0.9 0.8 0.2 1.2 1.0 15.1 0.9 1.4 0.1 1.1 1.0 8.9 0.8 1.4 0.2 1.2 1.1 21.7 0.8 1.3 0.1 1.2 1.0 18.8 4.6 5.5 0.7 29.1 2.9 4.5 1.5 33.8 8.1 9.2 4.0 38.3 8.2 9.5 2.2 44.5 19.6 16.2 3.1 0.8 2.1 10.9 2.5 31.0 19.8 2.6 1.7 2.0 22.9 2.1 11.0 9.7 2.3 4.4 1.5 9.1 1.8 10.9 9.4 2.0 2.5 1.2 7.3 1.5 CY2009 CY2010 CY2011E CY2012E

October 20, 2011

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Hexaware | 3QCY2011 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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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%)

October 20, 2011

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