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VandanaPareek - Assistant Research Analyst ([email protected]); 0261-6725518
IT Consulting & SoftwareInitiating Coverage |
21 January 2019
Investors are advised to refer through important disclosures made at the last page of theResearch Report.Jainam Share Consultant research is available on www.jainam.in
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IndexA. Company Overview
1. About……………………………………………………….…………….…….32. Investment Rationale……………………………………….…………………43. Risk………………………………………………….………………………….5
B. Industry Overview
1. Software Industry….….……………………………………………..………………………………….6
C. Business of the Company
1. Service Offerings…….……..…..………….…………………….………….……..82. Revenue Break-up…...…………………………………………………….….143. Top Shareholders…………………………………..…………………………164. Management………………………………………………………………….16
D. Financial Outlook
1. Balance Sheet……………………………….……………….….……………..172. Profit & Loss…………………………………….………….………...………….183. Cash Flow Statement…………………………………………………..………184. Ratio………………………………………..….………………………………19
E. Analysis
1. Peer Analysis………………………………………………………………….202. Valuation………………………………………………………………………22
F. Conclusion
1. Recommendation…………………………………….………………………..252. Sources……………………………………………….………………………..263. Full Form & Glossary………………………………………………………….274. Report Gallery………………………………………………………………….285. Disclaimer……………………………………………………………………..29
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Company Overview
About
Exchange: BSE BSE Code: 532129 Current Market Price: 324.95 Date:17-Jan-19
Latest Date 17-Jan-2019
Latest Price (Rs) 324.95
52 Week High (Rs) 557.40
52 Week Low (Rs) 294.80
Face Value(Rs) 2.00
Industry PE 19.90
TTM Period 2018-09
Price/BV(x) 4.01
EV/TTM EBIDTA(x) 11.50
TTM PE 16.64
EV/TTM Sales(x) 2.08
Dividend Yield% 1.23
MCap/TTM Sales(x) 2.20
Market Cap (Rs in Cr. ) 9669.58
EV (Rs) 9139.80
Latest no. of shares (in Cr.) 29.76
Source : Ace Analyser, Software
Hexaware Technologies Ltd.
Hexaware Technologies Limited (HTL), foundedin 1990 by Atul chandra Nishar, is a globalprovider of IT, BPO and consulting services.They serve customers in Banking, FinancialServices, Capital Markets, Healthcare,Insurance, Manufacturing, Retail, Education,Telecom, Professional services (Tax, Audit,Accounting and Legal), Travel, Transportationand Logistics.
They deliver highly evolved services in RapidApplication prototyping, development anddeployment; Build, Migrate and Run cloudsolutions; Automation-based Applicationsupport; Enterprise Solutions for digitizing theback-office; Customer ExperienceTransformation; Business Intelligence &Analytics; Digital Assurance (Testing);Infrastructure Management Services; andBusiness Process Services. Hexaware's globaloperations are located in North America,Europe and Asia Pacific.
The Company is on a transformation journey,helping organizations re-imagine theirbusinesses, shrink IT costs, enhance theirbusiness operations, accelerate digitaltransformation and maximize returns using its‘Shrink IT Grow Digital strategy’.
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Investment Rationale
Organic Growth: In the last three years, Hexaware has been the fastest organically growingIT services company. Over the past three years, Hexaware’s revenue growth hasoutperformed that of peers on an organic basis, led by its ‘Shrink IT, Grow Digital’ strategy.For boosting organic growth, it launched an initiative known as the Hyper-Growth PremierLeague. Teams in Cloud, Call Centre Transformation, Integrated Automation, EnterpriseIntegration and Analytics compete against each other gaining a score based on customersacquired and revenue generated.
Robust Financial compared to Peers : Hexaware return on capital employed is 34% ascompared to its mid - cap peers, whose ROCE is below 28%. Companies ROE is also above 20%as compared to other software companies except Mindtree. Sales growth is far better than itscompetitors which is around 11%.
Promoters Holding : HT Global IT Solutions Holdings Limited holds 62.66% share inHexaware technologies. HT Global IT Solutions Holdings Limited operates as an investmentholding company. Baring Private Equity Asia's (BPEA) wholly owns HT Global IT SolutionsHoldings Limited.
Higher growth compared to industry : Worldwide IT spending is USD 3.6 trillion in 2018with a growth rate of 4.5% and it expected that in 2019 that growth rate will be 3.2% which islower. It is expected that enterprise software spending will increase at a growth rate of 8.3%.Hexaware sales is growing at a CAGR of 15% in last 5 years which is above industries growthrate.
Lower Client Concentration : Majority of the clients of Hexaware are below USD 5 millioni.e. above 150+ clients. Due to which any furlough in clients will not hit its revenue badly. Ithas only 4 clients above USD 20 million.
Collaboration with Microsoft : Hexaware announced a global collaboration withMicrosoft to accelerate cloud adoption by enterprises. This collaboration is focused on drivingdigital transformation with clear business return on investment for enterprises usingMicrosoft Azure across the globe. As a part of this collaboration, Hexaware will use Azure inbuilding solutions that improve reliability and reduce operating costs while transformingcustomer experiences.
Particular PersistentSystem Cyient NIIT Tech Hexaware
Tech. Mindtree Mphasis
ROCE% 21.30 22.72 23.54 34.25 26.55 18.57
ROE% 16.16 18.44 18.00 21.51 21.54 14.46
ROA (%) 13.16 10.61 10.51 21.72 16.21 11.85
SalesGrowth(%) 5.39 9.15 6.76 11.52 4.32 7.73
PATM% 10.65 10.69 10.32 12.66 10.44 12.79
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Risk
Currency Volatility: Company derives 77.40% of total revenue from North America and13.30% of the business revenue arise from Europe, hence any currency volatility could impactits margins. H-1B visa regime by US President Donald Trump has raised concerns amongIndian IT firms, as any changes in the visa regime may result in higher operational costs andshortage of skilled workers Indian outsourcing industry.
Stiff Competiton: Company is facing stiff competition from other large and small softwarecompanies in India and they have lack of pricing power. Rapid changes in competitors’offerings and technological landscape lead to new product requirements by customers over ashort period of time. Companies like
Infosys: are in Aerospace & Defence, Agriculture, automotive, communicationservices, financial services, healthcare, insurance, life science, oil & gas, retail andmany more.
NIIT Technologies: Travel & Transportation, Insurance, Banking & Financial Servicesand enterprise services.
Mphasis: Banking - Capital market, Insurance, communication, healthcare, energy &utilities, logistic, manufacturing and other.
Mindtree: Banking, Capital market, consumer packaged goods, consumer technology,education, manufacturing, travel & hospitality and other.
Wipro: Aerospace & Defence, automotive, healthcare, natural resources, securities &capital market, oil& gas, pharmaceutical & life sciences and other.
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Industry Overview
Software Industry
In the last decade, the industry has grown five fold in revenue terms, and relative share to India’sGDP has increased to > 7.9 percent in FY2017-18. India is the topmost off-shoring destination forIT companies across the world. Having proven its capabilities in delivering both on-shore andoff-shore services to global clients, emerging technologies now offer an entire new gamut ofopportunities for top IT firms in India. The country's cost competitiveness in providing IT services,which is approximately 3-4 times cheaper than the US, continues to be its Unique SellingProposition (USP) in the global sourcing market. Indian IT-ITeS industry offers cost-effectiveness,great quality, high reliability, speedy deliveries and, above all, the use of state-of-the-arttechnologies globally.
Indian global sourcing market growth continues to outperform IT-BPM industry growth. During2017-18, the global IT-ITeS market grew to US$ 1.3 lakh crore (excl. hardware) and global sourcingmarket increased by 1.4 times to reach US$ 18500-19000 crore. India continued as the world’s topsourcing destination with a significant share of 55%. Indian IT-ITeS industry has set up over 1000global delivery centres in over 200 cities in about 80 countries around the world.
The USA, UK and EU remain the major markets for the IT software and services exports,accounting for ~90% of the total IT-ITeS exports, however, there are new challenges surfacing inthese traditional geographies. Demands from Asia Pacific (APAC), Latin America and Middle EastAsia is growing and new opportunities are emerging for expanding in continental Europe, Japan,China and Africa. The estimated share of export markets in FY2017-18:
Source :Ministry of electronic and IT, Website
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Worldwide IT spending is projected to total USD 3.8 trillion in 2019, an increase of 3.2 percentfrom expected spending of USD 3.7 trillion in 2018, according to the latest forecast by Gartner.
Growth Drivers
Enterprise Software: Enterprise Software is expected to register a growth of 8.3% to reach$425 billion. Under its ambit, Infrastructure software is expected to grow at 5.9% in 2018 andat a CAGR of 5.8% till 2021.
IT Services: The IT service segment is expected to grow at CAGR of 4.8% till 2021, to reachthe market size of $1.1 trillion. Amongst which, Infrastructure as a service shall be the highestcontributor to the growth while more traditional infrastructure outsourcing service delivery isexpected to contract.
Communications Services: The consumer mobile services sector is expected to grow at arate of 2.5% annually till 2021. The shift has been seen in Asian markets where the users arereducing mobile data only connections and thus shifting from tablets to mobile phones.
2017
Spending
2017
Growth(%)
2018
Spending
2018
Growth(%)
2019Spending
2019Growth(%)
Data CenterSystems 181 6.4 192 6.0 195 1.6
EnterpriseSoftware 369 10.4 405 9.9 439 8.3
Devices 665 5.7 689 3.6 706 2.4
IT Services 931 4.1 987 5.9 1034 4.7
CommunicationsServices 1392 1.0 1425 2.4 1442 1.2
Overall IT 3539 3.9 3699 4.5 3816 3.2
in USD trillion
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Business Of The Company
Service Offerings Application Transformation Management : They provide comprehensive Application
Transformation and Management services that are designed to provide effective systemintegration services across industries. Their approach for custom development follows a‘Mobile First’ strategy, ensuring applications are seamlessly accessible across devices andchannels. Application Transformation Management services encompass enterprisearchitecture consulting, application development, SOA & integration, Agile DevOps, and CloudServices.
Agile Transformation Services : This approach provides a large amount of servicesencompassing assessment, practical transformation road map, implementation andsupport across all functions from the executive level, portfolio, program, execution,delivery and operations.
Enterprise Architecture : Enterprise Architecture (EA) is transforming into a platform toinnovate business models, drive market changes, and extract more business value fromexisting investments. Hexaware’s EA platform, composed of multiple competencies andcapabilities aligned around the business life cycle of an organization. To standardizeservices and improve an engagement’s cycle time, they tailor the offerings according toeach industry vertical by using solution templates, function models, referencearchitecture, and guidelines.
API & Integration : Hexaware’s integration solutions helps in delighting the partners,vendors and customers alike with unified experience for better business, every time. TheIntegration Center of Excellence (CoE) as a Service helps in servicing integrationrequirements such as API-led connectivity, microservices enablement, applicationintegration, business activity monitoring, SOA, EAI & ESB integration, mobility integrationsand cloud, on premise and hybrid integrations. Services Offering :
Experience & Marketplace API
Microservices Driven Application Enablement
Legacy Integration Platform Modernization
API Driven Process Optimization
Enterprise Automation
Integration CoE as a Service
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Application Development :
Capabilities SolutionAccelerator Functionality
Mobile first approachdevelopment WorkQuikr
Mobile Application Development Platform(MADP) to prototype, create, deploy andmanage enterprise mobile applications.
Model driven appdevelopment
AppGenModel-driven architecture (MDA) for variousindustry standards & frameworks, and webservices.
AppStarterKit
Pattern-driven software factory that offers asolution structure for different applicationtypes, and a component & guidance library tosimplify and accelerate the development oflayered applications.
Tool-driven appdevelopment
HexceleratorStudio
Collection of tools, reusable components andplatforms that enable multi-layeredapplication development. It also supports thecreation of prototypes, code quality definition,and management of the entire applicationlifecycle.
Framework-driven appassessment, upgrade &migration
Portfolio AnalysisTool (PAT)
Multidimensional portfolio analysis from aService-Oriented Architecture (SOA)perspective. It also enables rationalization ofthe application portfolio and provides an SOAapplication roadmap.
Cloud app assessment,migration, development, andmultitenant and SaaSenablement
Cloud AppAssessmentReport (CAAR)
Report for identification of ‘quick win’applications that have potential to offer higherreturns and reduced Total Cost of Ownership(TCO).
Application CloudEnabler (ACE)
Web-based wizard to seamlessly transferon-premise web apps to the Amazon WebServices (AWS) cloud.
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Software product Engineering : Hexaware's Software Product Engineeringin Enterprises for Digital ( Hi Speed). It provides best in class and comprehensive ProductEngineering Solutions to enhance there client's capabilities in adopting new digital models,proactively address customer requirements and quicker time to market to further theircompetitive edge.
Cloud Services : Cloud services are grouped under four categories to offercomprehensive support to businesses in their cloud journey at every step of the way.Hexaware enables organizations to enhance their infrastructure and applications byintroducing automation and utilizing hybrid cloud services.
Application Support & Maintenance : Hexaware has redesigned its core ApplicationMaintenance and Support offering to help there customers focus on delivering digital andinnovative strategies, by alleviating their locked-in application maintenance cost. Applicationservices are customized to meet the needs of today’s nimble enterprises, while being focusedon preempting issues and enhancing application stability.
NextGen ASM : NextGen ASM caters to organizations that are required to deal with theapplication support needs of the fast-changing digital applications along with theslow-paced legacy and back-end applications. NextGen ASM is designed to enableHexaware’s Go Digital vision for its customers.
Business Intelligence and Analytics : Hexaware is the partner-of-choice for Chief DataOfficer (CDOs) in the data2digitalTM journey to transform information systems frommanagement decision-support systems to analytical engines powering the Digital Enterprise.Services Offered:
Cloud EDMA : Cloud EDMA (Enterprise Data Management & Analytics) is designed toprovide a holistic solution to businesses for kickstarting their cloud migration journey in acost-effective manner, without affecting existing systems and processes. They automatethe Data Warehouse landscape — assessment, consolidation and migration byfast-tracking processes, speedy deployment, recovering anomalies, and using strongsecurity and governance.
Analytics Services : Hexaware has well defined maturity road maps for each of thedomain areas. Hexaware has developed offerings in upcoming areas of analytics like video,voice, image and text. They partner with and nurture niche innovative startups to developcompetency in upcoming technologies.
DAOSaaSify
Lite Data Access Object (DAO) tool to definethe tenancy model and generatemulti-tenancy persistence layer classes fromany resource model for multi-tenant enabledDB.
App and websitedevelopment for Windows10 Universal WindowsPlatform (UWP)
SiteScanQuikrCompatibility scanner for Internet Explorer 11and Microsoft Edge browsers to addressviolations.
UniversalWindows apps kit
Starter kit and reusable components for UWPapp development and migration.
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Internet of Things : Hexaware offers the following IoT solutions:
Fleet Management
Used Based Insurance
Vehicle Equipment Leasing
Big Data Analytics & Services : Hexaware Business Intelligence & Analytics solutionscombine the best of both worlds – Strong Domain Expertise with impeccable technologycredentials – to provide the “Right” solutions to our customers.
Data Science Community :
Hexaware with its first-hand experience of solving data science problems realized earlier onthat building and nurturing a team of Data Scientists at scale requires a markedly differentapproach compared to the traditional learning and development model. Hexaware’s robustData Science Community Development Approach follows the innovative 7E approach:
Explore & Elaborate: Analyze and articulate market trends and use cases.
Evaluate & Evangelize: Assess, choose and socialize solutions and methodology.
Empower, Engage and Expand: Enable the community to explore unchartered areas andbreach boundaries to deliver newer insights to our customers.
Business Process Services : Hexaware is a new age Business Process Services provider,focused on delivering business impact and create sustainable advantages for its customers bytransforming the back office and front office operations.
Robotic Process Automation : RPA is the use of software to handle high-volume,repeatable tasks. RPA technology can be used to handle such processing, while providingspeed in execution and improvement in accuracy.
DataScientist
Strong Businessacumen & abilityto tell compellingstory through
visuals
AppliedKnowledge in
Math,Algorithms,Modelling &Statistics
Large & ComplexData Crunching
Abilities
Source : Website, Hexaware Technologies
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Finance & Accounting : Hexaware brings in a unique amalgamation of Finance &Accounts (F&A) BPO services delivery capability and ability to drive in optimal automationacross complete F&A value chain. Sub offering are : Procedure to pay services, Order tocash services, Record to report Services.
Customer Experience Services : Hexaware follows a standard approach to study CSATand NPS. Attempt to link the customers end-to-end journey through multipletouchpoints.
Human Resources : Comprehensive HR services on transactional, administrative andstrategic tasks help streamline your processes that enable employees and stakeholder toeasily access, update, and manage HR information to take the right decisions.
Digital Customer : Digital Transformation Consulting: Offer consultation to move towards a solution that
provides transformational outcomes in terms of customer experience, business efficiency,and business innovation.
Automate Everything: Hexaware’s Automating Everything strategy aims at helping ourclients with lowered costs, minimal human intervention and dramatically improvedend-user experience.
Cloudify Evetything : With there Cloudify Everything strategy, we offer a diverse set ofcloud-related solutions, tools, and platforms encompassing the complete lifecycle ofcloud.
Transform Customer Experience: Hexaware follows a design-led approach with a focuson helping clients build Customer Experience, thereby delivering ultimate value to them.
Digital Assurance : Hexaware’s Digital Assurance practice empowers enterprises to bedigital disruptors in their market place.
Quality Engineering : Quality Engineering is a process of testing, analyzing and improvingsoftware quality throughout the application development lifecycle. The process of QualityEngineering relies more on Test Automation than manual testing.
DIGI-Test : Hexaware follows an Automation-first approach right from test creation toimplementation cycles, backed by our own IP platform ‘Digi-test’ – Digital Testing Solution.Hexaware’s ‘Digi-Test’ offering provides a range of end-to-end solutions fromMulti-Channel to API to Big Data Testing in line with Agile and DevOps culture.
Managed Services: Managed Testing Services provide the test organization, processes,high quality QA services, testing directors and qualified testing engineers to resolve majortesting-related problems and achieve best results.
Test Advisory & Consulting : Hexaware’s test advisory and consulting services offeringincludes end-to-end QA IT evaluation and assessment across various facets viz., people,process, technology & tools.
Enterprise Solutions : Hexaware’s Enterprise Solutions group has been a forerunner inenabling process and IT transformation with the power of best-of-breed packaged solutionsthat transforms businesses across industries. Service Offering:
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Human Capital Management
Finance Transformation
Business Process Management Services
Workday Services
SAP Services
Oracle E - Business Suite Services
Oracle Cloud Application Services
PeopleSoft Services
Supply Chain Transformation
Salesforce Consulting Services
Infrastructure Management Services : Infrastructure Management Services focuses ondigitalization which allows us to propose two key differentiators for our customers in the formof application aware infrastructure and supreme user experience. Process HarmonizationSolutions have helped enterprises to improve & standardize IT processes, across its global ®ional business units.
Cyber Security Resilience Services
Digital Workplace
Hybrid Cloud
Integrated Run
Digital Operation
Application Operation
Service Management
Raise IT Platform
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Revenue Break-upGeography wise
Alliances & Customers
Key Alliances
Automation Anywhere : Automation Anywhere is the leader in Robotic ProcessAutomation (RPA), the platform on which more organizations build world-class IntelligentDigital Workforces. Automation Anywhere provides automation technology to leadingfinancial services, insurance, healthcare, technology, manufacturing, telecom and logisticscompanies globally.
Mulesoft : MuleSoft provides the most widely used integration platform for connecting anyapplication, data source or API, whether in the cloud or on-premises. MuleSoft providesAPIhub, a directory that is designed to function as a social network for developers to shareupdates and information.
Source : Investor Presentation, Hexaware Technologies
Source : Investor Presentation, Hexaware Technologies Source : Investor Presentation, Hexaware Technologies
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Microsoft : Microsoft is the world’s leading producer of computer software. Its best knownsoftware products are the Microsoft Windows line of operating systems, Microsoft Officeoffice suite, and Internet Explorer and Edge web browsers.
Oracle : Oracle Corporation is the world's leading supplier of software for informationmanagement, and the world's second largest independent software company.
PEGA : Pegasystems Inc. is the leader in software for customer engagement and operationalexcellence. Pega's adaptive, cloud-architected software - built on its unified Pega Platform -empowers people to rapidly deploy, and easily extend and change applications to meetstrategic business needs.
SAP : SAP is the world’s largest inter-enterprise software company and the world’sfourth-largest independent software supplier, overall. SAP is headquartered in Walldorf,Baden-Württemberg, Germany, with regional offices in 130 countries.
Salesforce : Salesforce is the world’s No.1 Customer Relationship Management (CRM)platform. Their cloud-based applications for sales, service, marketing, and more don’t requireIT experts to set up or manage, users can simply log in and start connecting to customers in awhole new way.
Workday : Workday is the leader in enterprise-class, Software-as-a-Service (SaaS) solutionsfor managing global businesses, combining a lower cost of ownership.
Clients Contribution
Contribution (in mn) No. Of Client
$50 + 3
$30 - $50 0
$20 - $30 1
$10 - $20 6
$5 - $10 15
$1 - $5 70
> $1 95
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Top Shareholders
Management
Name DesignationR. Srikrishna Chief Executive OfficerAshok Harris President – Global Delivery
Amrinder Singh Senior Vice President - Europe Operations
Krishna Kumar Chief Technology Officer
Amalesh Mishra Vice President - APMEA Operations
Ravi Vidyanathan President & Global Head - Banking &Financial Services
Arun Ramchandran Executive Vice President & Global Head -Professional Services
Senthil Nayagam K Senior Vice President & Global operationalHead - ETS
Arvind Kashyap Senior Vice President & Global Head -Manufacturing & Consumer
Prasan Prabhakaran Senior Vice President & Global Head -Enterprise Solution
Chinmoy Banerjee Executive Vice President & Global Head -Business Process Services
Eswar Venkatachalam Vice President & Head - Travel &Transportation
Shareholders % HoldingHDFC Trustee Company Ltd. 2.82
T. Rowe Price International Discovery Fund 2.06
SBI MagnumMIDCAP Fund 0.42
Aviva Investors - Emerging Markets Equity Small Cap Fund 0.53Vanguard Emerging Markets Stock Index Fund, Aserie’S Of VanguardInternational Equity Index Fund 0.38
Emerging Markets Core Equity Portfolio (The Portfolio) Of DFAInvestment Dimensions Group Inc. 0.51
The Emerging Markets Small Cap Series Of The Dfa Investment TrustCompany 0.48
Vanguard Total International Stock Index Fund 0.41
Ishares Core Emerging Markets Mauritius Co 0.20
Gmo Implementation Fund A Series Of Gmo Trust 0.44
As on dec. 2017
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Financial Information
Balance Sheet
Particulars Dec -2015 Dec -2016 Dec -2017 TTM
Assets
Non-current assets
Property, plant and equipment 295.71 279.10 358.03 366.78
Capital work in progress 116.03 323.32 256.31 243.43
Goodwill 171.53 176.12 165.63 187.93
Other intangible assets 23.45 23.44 17.71 12.52
Financial assets 24.10 39.20 42.36 31.09
Other Assets 234.49 236.51 251.77 312.26
Current Assets
Financial Assets 1096.41 1179.82 1385.72 1857.69
Other Assets 42.33 53.47 67.78 67.01
Total Assets 2004.05 2310.98 2545.31 3078.71
Equity & Liabilities
Equity 1520.16 1740.91 2007.27 2332.40
Non current liabilities
Financial Liabilities 5.23 3.12 3.11 32.45
Provisions 18.21 26.80 17.93 18.51
Current Liabilities
Financial Liabilities 313.91 373.34 380.77 516.29
Other Liabilities 64.24 59.55 58.97 70.26
Provisions 71.86 88.62 70.73 76.23
Current Tax Liabilities 10.44 18.64 6.53 32.57
Total Equity & Liabilities 2004.05 2310.98 2545.31 3078.71
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Profit and Loss
Particulars Dec -2015 Dec -2016 Dec -2017 TTMIncome
Revenue from Operations 3123.52 3534.90 3942.01 3395.34
Exchange rate difference 8.14 35.59 44.96 71.94
Other Income 9.01 3.84 3.58 7.54
Total Income 3140.67 3574.33 3990.55 3474.82
Expenditure
Software & Development Expense 532.59 630.08 739.19 733.72
Employee Benefit Expense 1773.22 1994.39 2168.65 1823.60
Operations & Other Expenses 281.89 334.07 379.00 295.85
Interest - Others 0.12 0.14 0.12 0.02
Depreciation & Amortization Expense 48.24 55.25 63.28 49.23
Total Expenditure 2636.06 3013.93 3350.24 2902.43
Profit Before tax and Share in profit ofAssociate 504.61 560.40 640.31 572.40
Share in profit of Associate - - 0.27 0.15
Profit before tax 504.61 560.40 640.58 572.55
Tax Expenses 111.40 141.23 141.05 112.54
Profit after tax 393.21 419.16 499.53 460.01
Cash Flow Statement
Particulars 2015 2016 2017Cash from Operating Activity 393.20 472.98 476.24
Cash from Investing Activity 14.15 -199.86 -93.80
Cash from Financing Activity -535.32 -314.21 -249.42
Net Cash Flow 93.14 23.70 102.86
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Ratio
Performance Ratios 2013 2014 2015 2016 2017
ROA (%) 22.52 18.06 21.08 20.05 21.72
ROE (%) 31.56 25.72 29.12 26.99 27.51
ROCE (%) 40.01 33.73 37.13 35.38 34.25
Growth Ratio 2013 2014 2015 2016 2017
Net Sales Growth (%) 17.31 12.97 20.99 13.17 11.52
EBITDA Growth (%) 18.70 -9.41 17.75 11.34 14.32
EBIT Growth (%) 18.67 -12.64 20.43 11.03 14.30
PAT Growth (%) 15.71 -15.56 22.82 6.60 19.11
Valuation Ratios 2013 2014 2015 2016 2017
P/E (x) 10.42 18.79 18.66 14.93 20.22
P/BV (x) 5.22 3.69 5.20 3.69 5.22
EV/EBITDA (x) 7.03 12.18 12.54 9.45 13.57
M Cap/ Sales 1.73 2.33 2.35 1.77 2.56
Du Pont Analysis 2013 2014 2015 2016 2017
PATM (%) 16.59 12.40 12.59 11.86 12.66
Sales / Total Assets(x) 1.36 1.46 1.67 1.69 1.71
Assets to Equity (x) 1.40 1.42 1.38 1.35 1.27
ROE (%) 31.56 25.72 29.12 26.99 27.51
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Analysis
Peer Analysis
Particular PersistentSystem Cyient NIIT Tech Hexaware
Tech. Mindtree Mphasis
Sales (Cr.) 3033.70 3917.50 2991.40 3942.01 5462.80 6545.84
PAT (Cr.) 323.09 418.70 308.70 499.26 570.10 837.50
PATM% 10.65 10.69 10.32 12.66 10.44 12.79
ROCE% 21.30 22.72 23.54 34.25 26.55 18.57
ROE% 16.16 18.44 18.00 21.51 21.54 14.46
ROA (%) 13.16 10.61 10.51 21.72 16.21 11.85
EPS 40.39 36.00 45.56 16.83 34.78 43.34
DividendYield (%) 1.45 1.89 1.74 1.18 1.16 2.37
P/E 17.10 19.13 18.97 20.22 22.25 19.47
Mcap.(cr.) 4385.20 7094.12 7552.48 9669.58 14243.93 16818.64
SalesGrowth(%) 5.39 9.15 6.76 11.52 4.32 7.73
EBITDAGrowth (%) 4.75 20.49 6.71 14.32 22.49 1.41
EBIT Growth(%) 7.13 28.53 15.82 14.30 32.26 2.47
PAT Growth(%) 7.17 27.93 13.45 19.11 36.19 5.80
P/BV (X) 2.61 3.25 3.03 5.22 4.66 2.99
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Application Development & Maintenance (ADM) Services
Companies Next-GenADM
AgileDevelopme
nt
ContinuousTesting
Next-GenADM BFSIIndustry
Next-GenADM - HCLSIndustry
Next-GenADM -
Manufacturing Industry
HCL Leader Leader Leader Leader Leader Leader
Cognizant Leader Leader Leader Leader Leader Leader
DCXTechnology Leader Leader Leader Leader Leader Leader
Hexaware Contender Rising Star Leader ProductChallenger Contender Not in
Infosys Leader Leader Leader Leader Leader Leader
Mindtree Leader Leader Leader ProductChallenger Not in Product
Challenger
Mphasis Not in Contender Not in ProductChallenger Not in Not in
TCS Leader Not in Not in Not in Not in Not in
Wipro Leader Leader Leader Not in Not in Not in
Capgemini Leader Leader Leader Leader Leader Leader
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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ValuationsScenario 1 assumption:
Based on Profit after tax margin
It is assumed that sales will grow with a CAGR of 15.14% till FY21 which resulted into theRs.6016.87 cr according to 5 years sales average.
We have assumed 5 years average EBITDAM (%) which is 17.13%.
FY 21 (E)
Particular 5 years avg. EBITDAM(%) - A
SALES (in Cr.) 6016.87
EBITDAM(%) 17.13%
EBITDA (in Cr.) 1030.93
EV/EBITDA (x) 13.57
EV (in Cr.) 13989.74
Cash-Debt (in Cr.) 529.77
MCap (in Cr.) 13459.97
No. of shares (in Cr.) 29.76
Price (Rs.) 452.28
Scenario 2 assumption: -
It is assumed that sales will grow with a CAGR of 15.14% till FY21 which resulted into theRs.6016.87 cr according to 5 years sales average.
Being on conservative side we have decreased EBITDAM (%) to 15.12% because as due toH-1B visa regime by US President Donald Trump has raised concerns among Indian IT firmsand due to which cost of employee may increase by 1% to 2%.
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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FY 21 (E)
Particular 5 years avg. EBITDAM(%) - A
SALES (in Cr.) 6016.87
EBITDAM(%) 15.12%
EBITDA (in Cr.) 909.75
EV/EBITDA (x) 13.57
EV (in Cr.) 12345.33
Cash-Debt (in Cr.) 529.77
MCap (in Cr.) 11815.56
No. of shares (in Cr.) 29.76
Price (Rs.) 397.02
Ben Graham's Formula
Here, EPS is the trailing 12 month EPS, 8.5 is the P/E ratio of a stock with 0% growth ( for beingon the conservative side) and g is the growth rate for the next 7-10 years.
Ben Graham's Formula: Value = EPS x (8.5 + 2G) In part - A Long term growth rate is considered as per 70% of 5 year net profit CAGR and in
part - B 50% of 3 year net profit CAGR is being considered.
Ben Graham’s FormulaA B
Avg 5-Yr Net Profit (Rs Crore) 402.20 402.20PE Ratio at 0% Growth 8.50 8.50Long-Term Growth Rate 6.16 8.00Ben Graham Value (Rs Crore) 8374.22 9854.73Number of Shares 29.76 29.76Graham Value/share 281.39 331.14
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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Discounted Cash Flow Valuation
Hexaware technologies last 5 year FCF growth rate is 21% so being on conservative side valuationis derived by assuming the growth of 19% for the next 5years and 16% growth from 6-10 years and2% after 10 years (Terminal Value) in the business. Discount rate is being assumed on the basis ofCAPM model.
Initial Cash Flow 381.00
Years 1-5 6-10FCF Growth Rate 19.00% 16.00%Discount Rate 11.50%Terminal Growth Rate 2.00%
Shares Outstanding(Crore) 29.76Net Debt Level -530.00
PRESENT VALUE CALCULATIONSYEAR FCF GROWTH PRESENT VALUE1 453.39 19% 406.632 539.53 19% 433.983 642.05 19% 463.174 764.03 19% 494.335 909.20 19% 527.586 1054.67 16% 548.877 1223.42 16% 571.028 1419.17 16% 594.079 1646.23 16% 618.0410 1909.63 16% 642.99
Final CalculationsTerminal Year 1948PV of Year 1-10 Cash Flows 5301Terminal Value 6904Total PV of Cash Flows 12204Number of Shares 29.76DCF VALUE/SHARE (Rs) 410.08
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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Conclusion
RecommendationHexaware Technologies Limited (HTL), founded in 1990 by Atul chandra Nishar, is a global providerof IT, BPO and consulting services. They serve customers in Banking, Financial Services, CapitalMarkets, Healthcare, Insurance, Manufacturing, Retail, Education, Telecom, Professional services(Tax, Audit, Accounting and Legal), Travel, Transportation and Logistics.
Hexaware has been the fastest organically growing IT services company. Over the past three years,Hexaware’s revenue growth has outperformed that of peers on an organic basis, led by its ‘ShrinkIT, Grow Digital’ strategy. HT Global IT Solutions Holdings Limited holds 62.66% share in Hexawaretechnologies and FII holding is also above 19%.
Hexaware return on capital employed is 34% as compared to its mid - cap peers, whose ROCE isbelow 28%. Sales growth is far better than its competitors which is around 11%. So, company hasrobust financial growth compared to its competitors.
Majority of the clients of Hexaware are below USD 5 million so any furlough in clients will not hitits revenue badly. Hexaware announced a global collaboration with Microsoft to accelerate cloudadoption by enterprises. Hexaware will use Azure in building solutions that improve reliability andreduce operating costs while transforming customer experiences.
We recommend our Investors to “BUY" the stock with potential upside of 39% with Horizon of 3years.
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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Sources Annual Report Investor Presentation Conference Call IBEF Ace Equity Global 2019 Quadrant Report - Mindtree Gartner Report prnewswire.com - website Ministry of Electronics & Information Technology Safal Niveshak
Research Analyst Details:
Name Designation Email IdTejas Jariwala Research Head [email protected] Zaveri Sr. Research Analyst [email protected] Patel Sr. Research Analyst [email protected] Agarwal Assistant Research Analyst [email protected] Pareek Assistant Research Analyst [email protected] Patel Assistant Research Analyst [email protected] Modi Assistant Research Analyst [email protected] Nalbandh Sr. Research Executive [email protected] Patel Jr. Research Executive [email protected] Bakshi Jr. Research Executive [email protected]
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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Full Form and Glossary
Abbreviation Full FormADM Application Development & MaintenanceBFS Banking & Financial ServicesBIBA Business Intelligence & AnalyticsBPS Business Process ServicesCAGR Compound Annual Growth RateCOGS Cost of Goods SoldDPS Dividend Per ShareDA Digital AssuranceES Enterprise SolutionsEBIT Earnings before interest and taxesEBITDA Earnings before interest, tax, depreciation and amortizationEPS Earning Per ShareEV Enterprise ValueFY Financial YearH&I Healthcare & InsuranceGP Gross ProfitGTT Global Travel & TransportationIMS Infrastructure Management ServicesMCap Market capitalizationM&C Manufacturing & ConsumerNAV Net Asset ValueNII Net Interest IncomeNOI Net Operating IncomeNPV Net Present ValueP/E Price/Earnings RatioPAT Profit After TaxPATM Profit After Tax MarginPBT Profit Before TaxPS Professional ServicesQOQ Quarter on QuarterRE Retained EarningROA Return on AssetsROCE Return on Capital EmployedROE Return on EquityROI Return on InvestmentRONA Return on Net AssetTTM Trailing Twelve Month
Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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Jainam Share Consultant Pvt Ltd Sector : IT Consulting & Software
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DisclaimerResearch Analyst Details
Name: Vandana Pareek Email Id: [email protected] Ph: +91 0261-6725518
Analyst ownership of the stock: No
Details of Associates: Not Applicable
Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their)personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is orwill be directly or indirectly related to the specific recommendation(s) or views contained in this research report.
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The views expressed are based solely on information available publicly and believed to be true. Investors are advisedto independently evaluate the market conditions/risks involved before making any investment decision.
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