Hexaware reported a strong Q4CY10 with 9%QoQ USD revenue growth led by volume growth of 7.8%QoQ and offshore pricing improvement of 1.7%QoQ. It surpassed its Q4CY10 revenue guidance by 2.5% indicating the strong demand environment.

Strong revenue growth in line with expectations – Revenues grew 6.4%QoQ to Rs2,996mn, lower as compared to USD revenues due to appreciation of rupee. EBITDA margins improved 300bpsQoQ led by lower SG&A expense
(200bpsQoQ decline) and improvement in billing and utilization. Higher tax rates dent PAT, which declined 5.7%QoQ. EPS stood at Rs2.7.

US and APAC lead the pack; BFSI vertical witnessed traction –US surged 13.7%QoQ and ROW grew 17.2%QoQ led by some robust demand in PeopleSoft and other key segments. Europe lagged with a decline of 4%QoQ. BFSI lead the pack among verticals with 12.1%QoQ growth, emerging verticals too reported strong growth of 9.3%QoQ.

Uptick in discretionary IT spend; healthy client addition across key geographies – Testing surged 38.9%QoQ led by demand in Europe, BI and analytics grew 19.4%QoQ and EAS increased 8.6%QoQ which are signs of increased focus towards discretionary IT spend. Hexaware added 11 new clients out of which 4 were in US, 4 in Europe and 3 in APAC. The total number of clients is 174. Top 10 clients grew 9%QoQ and now contribute 50% of revenues.

Outlook and valuation – Hexaware has given a USD revenue guidance of 5%QoQ for Q1CY11 and 25%YoY (at least) for CY11. Hiring guidance of 1,500 employees for CY11. We have assumed ~27% USD revenue growth with some pricing increment. There are margin levers like utilization, offshoring and change in employee mix towards freshers. We have factored increase in gross margin due to above reasons and negative impact of salary. SG&A as % of revenue is lowest since Q4CY06. The current price factors in the margin expansion and robust revenue growth. The stock is trading at
11.3x CY11E EPS.