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As rising salaries and the appreciating rupee start hitting the software services sector, companies need to think of new ways of improving or at least maintaining margins. One way the Indian companies are fighting this situation is by moving up the value chain, so that they can derive higher revenues per headcount. Therefore, larger companies are now busy acquiring consulting or niche companies that typically have better margins and a loyal client base. They are also looking at acquiring targets with a strong marketing network, which once again can be leveraged for reducing marketing overheads.

This inorganic method of improving margins comes in handy as many of the Indian companies have large amount of cash in their books that they can utilize to move up the value chain. Among such companies is Mumbai-based Hexaware Technologies that has been aggressively looking at acquisitions to move into more value added services.

Hexaware Technologies a provider of IT and BPO services in HR, banking and financial services, insurance, leasing and transportation with focus on delivering business results from technology solutions, and specializes in business intelligence and analytics, enterprise applications, application modernization/management and independent testing, HR and payroll outsourcing, and claims processing. It also provides advisory services to corporations on off shoring, architecture consulting and portfolio analysis, with twenty-one offices located in the US, Europe and Asia Pacific, and development centers in Mumbai, Chennai and Pune and a near-shore center in Bad Homburg, Germany.

Founded in 1990, the company's current equity stands at Rs 26.44 crore wherein the promoters hold 25.66% stake, institutional investors 60.38%, Indian public 13.89% and custodians 0.07%of the stake. Founded by Atul Nishar, currently the chairman, Hexaware has grown into a $154 mn software services and solutions corporation with over 5,000 employees in 16 locations worldwide. He is also the co-founder of Infinity Technology Investments, a venture capital fund. Atul Nishar received his Bachelors in commerce and a degree in law from Mumbai University and is also an FCA. He is a member on the government of Maharashtra chief minister's Steering Committee on Information Technology and Biotechnology. The CEO of Hexaware is Rusi Brij who has over twenty-five years of experience including a long stint at Satyam where he was executive vice president.

Hexaware's consolidated revenues for the financial year ending December 31, 2006, amounted to Rs 848.21 crore registering a growth of 27.3% as compared to Rs 678.66 crore in the last fiscal. Net profit for the same period stood at Rs 124.42 crore, an increase of 35.8% as compared to Rs 91.50 crore in the previous year.

During the year, Hexaware Technologies raised Rs 300 crore from General Atlantic LLC, a leading private equity fund, through a preferential issue. The proceeds were to be used for infrastructure, M&A and working capital requirements. The company also set up its third India development centre in Pune to seat 250 professionals. It also bagged two contracts from two corporations based in North America.

For the fourth and final quarter ended December 31, 2006, Hexaware's consolidated revenue stood at Rs 240.22 crore, an increase of 38.06% as compared to Rs 174 crore on a y-o-y basis and a 6.78% growth on a q-o-q basis. Net profit stood at Rs 33.75 crore, an increase of 36.36% as compared to Rs 24.75 crore in the same period last year and a decline by 2.68% as compared to Rs 34.68 crore on a sequential basis. During the quarter, the company earned 61% of its annual revenues from onsite business activities as against offshore revenues, contributing the balance 39%. The quarter witnessed an addition of 350 employees as a result of which the total staff strength of the organization stood at 5,829. Twelve new clients were added during the quarter, taking total active clients to 129 compared to 119 in the previous quarter. Hexaware also increased the mn dollar client additions from 30 to 41 during the quarter.

During the quarter, Hexaware also acquired Focus-Frame, a US based testing services firm in automation testing of ERP and custom application in an all cash deal of $34.3 mn. The company also entered into a partnership with Fluensee, a provider of RFID-enabled asset management, as a partner to offer RFID-enabled solutions for its customers. Hexaware has set up a center of excellence on RFID for this purpose. It also entered into an alliance with Borland Software India, a subsidiary of Borland Software, for Borland India to provide visual modelling and designing, and change management solutions, training and consulting services to Hexaware. It also plans to double its headcount in two years to scale up its operations

The company expects revenue from operation for the first quarter of 2007 ending March 31, 2007 to be in the range of 264 crore, and profits in the range $8 mn. We believe that Hexaware is enroute to better results in the coming quarters driven by its acquisitions and new capacity builds to show around 40% growth in topline. Margins will however remain under pressure to the rising local costs and rupee appreciation.

Hexaware Technologies currently trades at Rs 168.45, discounting the December 2007 EPS by 15.15 times and is in line with the growth prospects of the company expected in the medium term. We believe that the share has limited upside in the current environment.

Sushanto Mitra
The author is the director, Techcap India
sushanto@techcapIndia.com
The views reflected here are of the author and not of this publication. No liability is accepted for losses based on the information presented here

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