HEXAWARE TECHNOLOGIES: Back With A Bang 

The company achieved net profits to the tune of Rs 5.93 crore in its third quarter which is a rise of 100% over the immediately previous quarter and 76% higher than the same quarter last year

As the second quarter results of software companies come in, the recovery in the software sector is becoming more and more apparent. The recovery has been brought about on the back of strong growth in IT outsourcing far more than the US economic upswing. This implies that once the US economy starts to roll, the performance of Indian software companies should improve further. What is heartening to note that most companies are showing improved
margins with revenue growth signifying better realization rates despite the appreciation of the rupee versus the US dollar.

Based on the improving performance and positive outlook for the future, Indian companies are gearing up by adding new capacities and undertaking aggressive recruitment drives. However, unlike the last boom, this time around companies are moving forward with more circumspect steps and with a focus on improving quality of clients and
contract durations that prepares them better for possible demand volatility in future. During the tech meltdown, many companies were faced with the problem
of clients who were going bankrupt or in financial distress especially in the dotcom, technology and telecom verticals.

The improved results and the new strategies adopted by companies provide optimism for the future performance of the sector.

Until now the Indian stock markets have largely ignored the changing outlook of the software sector and stocks have remained
relatively subdued compared to the activity happening in other sectors. However, we believe that as the first half results of software companies come in and we shall see some positive surprises on the way, an overall re-rating of the sector cannot be
ruled out.

Among the companies that have shown remarkable growth across quarters is Mumbai-based Hexaware Technologies.

Founded in 1992, the company subsequently merged with Aptech. Thereafter, the education business of the company was hived off and Aptech was renamed Hexaware as it now stands. This rather complex route of listing the company had in the past affected the investor rating of Hexaware, but with increased FII holding in the company including that of Citigroup, the stock is now back in the reckoning. Out of the total equity of the company 39% are held by promoter groups while 8 % are held by banks and institutional investors and the balance 53% are held by the Indian public and other corporate bodies.

Hexaware focuses primarily on marketing three technology practices - PeopleSoft services, application management solutions and e-Solutions largely to the banking and financial services, insurance and transportation industries. In addition, the company also offers offshore R&D solutions practice comprising embedded software and chip development and testing. The company has largely been onsite-driven, revenues of which
contribute almost 63% of the total turnover. Among verticals banking and financial services contributes
57% followed by manufacturing and enterprise solutions that contribute another 22%. Geographically, US and Europe provide 68% and 22% of sales respectively. Key clients of Hexaware include Exult, IBM, Citibank, Axa Financial Group, and Royal Sun Alliance.

The employee strength as on October 1, 2003 stood at 2001, comprising 1796 development staff and balance in support and marketing. Hexaware has three development centers in Mumbai, Bangalore and Chennai. Hexaware Towers at Chennai has recently become operational and can accommodate 700 people.

This year has been an eventful year for Hexaware with a number of partnerships and a divesture. The company signed a strategic alliance with Temenos for implementation of their banking products. The agreement envisages that Hexaware will provide implementation and support services for Temenos’ products. Temenos based out of Switzerland is a well-established player in the banking and financial services markets.

Hexaware further strengthened its Peoplesoft offerings with a partnership with Peoplesoft for support services out of its Bangalore center. This center will offer remote configuration to Peoplesoft customers worldwide. It is expected that by the year end the center will house 700 professionals for this service. The company also sold of its entire stake in Mentorix Technologies Inc., USA to Lionbridge Technologies Inc., a Delaware Corporation for approximately US$ 7.5 million in all cash deal resulting in a onetime profit of $ 4.15 million. During the year so far the company has acquired 20 new clients out of that five are Fortune 500 clients indicative of the focus on the larger and long-term client relationships.

Hexaware Technologies reported global software revenues of Rs 91.44 crore for the quarter ended September 2003 as compared to Rs 78.12 crore in the last quarter, up 17%. Compared to the same quarter last year this was higher by 37%.

The company achieved net profits of Rs 5.93 crore for the third quarter as compared up by 100% over the immediately previous quarter and 76% higher than the same quarter last year. This increase was due to better offshore rates on higher volumes. During the last quarter the company has added 6 new clients and increasing focus on larger and typically Fortune 500 clients. During the quarter, the company has increased its headcount primarly in the offshore centers that has gone up by 23% as against 16% in the on-site staffing.

Looking ahead, the company proposes to further strengthen its positioning in niche areas both vertically and geographically and farm existing clients for more business. The company seems to be confident about its ability to do so as many of its client relationship have now entered the mature phase and revenue visibility has improved. Until now the company remains on-site focused and success in offshore arena has been somewhat subdued. We believe that this remains a key area of concern and success in this area rather than acquisition of larger clients in the short term determine Hexaware’s future status in the Indian software landscape in the medium and long term.

The stock markets have been rising steadily in the last few months and further rise is expected as better first half results of Indian companies are reported. We believe that while the markets will continue to rise, technology stocks will take some more time to start their northward journey as the technology sector remains outside the buying list of most foreign institutional investors and mutual funds as a hangover of the past. However, as the fundamentals of the sector improve, tech nology stocks cannot be ignored by funds for long. One can expect significant activity in these stocks in the immediate future. From an investment perspective, this indicates that investors in technology stocks should remain invested and any major downturn should be seen as a buying opportunity.

In line with last two quarters of excellent performance, the shares of Hexaware Technologies have been rising steadily at the bourses and are currently trading at Rs 323, discounting its FY03 earning per share by 26 times and FY04 earning per share by 21 times respectively. Hexaware has recently raised its guidance for
the year 2003 and we say that the improving US markets should further boost performance in the
2004 fiscal year. We believe that the shares are fully priced in the current scenario and despite some strong
performance expected in the fourth quarter of the current year, the shares of the company are unlikely to outperform other software stocks in terms of appreciation. Market Performer.

Sushanto Mitra is the founder of Technology Capital Partners