With a 40 per cent revenue growth in FY2004, the fastest
amongst the top-20 Indian IT Services exporters Hexaware has emerged as one of the
favourites investments in the technology space. The company’s strategy of forming
niches and winning Fortune/Global 500 clients has begun to pay off and will continue to
sustain growth going forward. Given the growing confidence in the visibility of current
business opportunities, Hexaware has raised its FY 2004 guidance significantly, which will
continue to keep the stock on the investment radar.
Background
Hexaware is an IT Services vendor, providing application
development, reengineering and maintenance services, enterprise solutions and embedded
software services. The company is largely into the Banking, Financial Services &
Insurance, and Airlines & Transportation space. Hexaware has 32 Fortune/Global 500
clients which include Exult, Citibank, Lufthansa, PeopleSoft, Deutsche Leasing, Unisys,
American Express, Standard Chartered, Air Canada, IBM, Royal Sun Alliance and North West
Airlines.
By the end of the last quarter Hexaware had 25 'million
dollar' clients (as against - 23 in March 2004), of which 4 are more than $ 5 million and
1 is more than $ 10 million in size. The top client contributed 11.3 per cent of revenues,
while the top 10 clients together contributed 57.3 per cent of revenues. 23.8 per cent of
revenues came from Europe, while North American share has increased marginally to 70. per
cent the balance 6.2 per cent came in from rest of the world. It has a strong presence in
Germany, from where it generates about 15-16 per cent of its business.
Points to consider
Given the strategy of targeting unexploited niches,
Hexaware had to make upfront investments. Its financials, thus, appeared inferior until
CY03. Its operating metrics compared poorly with even smaller peers. Its utilization was
low, onsite contribution was high and SG&A costs were disproportionately high.
However, the initiatives taken then have begun to pay off the company has recorded its
fifth consecutive quarter of double-digit growth in both revenues and profits.
Hexaware’s strategy has been to focus on creating
differentiated service offerings, not targeted by others, in geographies that are
difficult to penetrate. Being a late entrant in the IT Services space, the only way it
could win marquee clients was by differentiating itself from industry leaders. Thus, it
built a credible PeopleSoft practice in Package Implementation (PI), focused on the
European geography and built domain expertise in the Airlines & Transportation
vertical, as there was limited competition.
It has one of the largest PeopleSoft practices, in terms of
number of people, globally. The company is identified with PeopleSoft in industry
seminars, by industry and financial analysts.
Another focus area for the company is the Airlines &
Transportation vertical, an area which was largely neglected by the established players.
The company built domain expertise in the vertical, from which it derives 16 per cent of
its revenues. Hexaware has won large orders from some of the biggest airlines in the
world. Given that airlines only spend about 2-2.5 per cent of their revenues on IT, few IT
Services companies have endeavored to build a practice offering solutions in this segment.
Hexaware is working around a 5-year strategic plan
for 2002-06. For each year, it has set an agenda. Beginning from 2002 to 2006, Hexaware is
set to stabilize, repair, turn around, build base and break out into the next orbit and be
amongst the top few in the tier-II category. It is ahead of schedule in incubating new
lines of business.
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