Bank of America retains `Underperform’ rating on Hexaware Technologies

Bank of America retains `Underperform’ rating on Hexaware Technologies. Though results were in line, Bank of America (BoA) was surprised by a very sharp revenue decline guided for 1Q at a negative 16% q-o-q with outlook being the weakest announced so far. This likely reflects high exposure to discretionary spends such as ERP (~ 29% revenue, -18 % q-o-q ).

Research: Bank of America
Rating: Underperform
CMP: RS 25

Estimates are cut by 5% to factor in a 17% cut in dollar revenues as reflected by weak 1Q revenue guidance and offset by higher margins due to falling rupee. Management highlighted that macro environment has worsened in 4Q; with clients across board rationalising IT spends. BoA expects margins to fall by at least 600 bps during 1Q. Also MTM losses in balance sheet increased to Rs 120 crore from Rs 100 crore q-o-q and are likely to impact CY09/10E profits if a weak rupee persists.

Revenue grew 4% q-o-q to $64.4 million in constant currency terms in line with its guidance. Stock rose 40% before results on low valuations. BoA expects 1% earnings growth in CY09E and 8% CAGR over next two years. With 1Q results likely to disappoint and a poor revenue outlook, stock could correct.

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