Hexaware's earnings are disappointing?

Hexaware, a global information technology consulting firm, posted marginal rise in consolidated net profit at Rs 84.2 crore for the quarter ended March 31, 2016 (Q1FY16) on a sequential basis. However, the company had reported a net profit of Rs 83.3 crore in the same period a year ago and Rs 99 crore in December 2015 quarter, highlighting the 15 percent decline in net profit.

CEO and Executive Director R Srikrishna, while commenting on the performance said, "While we had a challenging quarter for revenue and profitability, bookings from new customers continued to be strong driven by automation and digital transformation."

However, analysts were expecting profit of Rs 106 crore on revenues of Rs 855 crore. According to analysts, considering that most of the midcap IT companies have reported sequential growth in rupee revenue at least, Hexaware's earnings are disappointing. G Chokkalingam, the founder at Equinomics Research & Advisory said, "In March quarter, Hexaware failed to show growth in net profit. The stock is stretched as it is still trading at 16-17 times its price earnings after today's correction without showing any growth. It is difficult for a midcap IT company to justify such valuations. Investors should look at Hexaware when it corrects to Rs 160-170."

Right after posting 15 percent decline in revenue, the company dropped nearly 10 percent to Rs 206 on the National Stock Exchange (NSE) in today’s early morning trade. Earnings before interest, tax, depreciation and amortization (EBITDA) margin declined by 60 basis points at 15.4 percent in Q1FY16 against 16 percent in previous quarter.

The company has also been investing significantly in creating a platform-centric approach to delivering IT outsourcing (ITO) services for both application and infrastructure management services. Hexaware also announced the launch of 'RAISE IT', a platform that it expects will fundamentally disrupt how ITO services are currently delivered.

According to Morgan Stanley - Global financial services firm and a market leader in securities and credit services - the company had provided an outlook of revenue growth ahead of industry along with stable margins for 2016. Post the decline in margins, the company will need a significant step up in growth and margins over the coming quarters to maintain its outlook.