Hexaware reported Q1CY11 revenue growth of 5.7%QoQ to USD70.4mn (PINCe USD70.5mn) led by volume growth of 4.9%QoQ and blended pricing improvement of 1.2%QoQ and offshore mix impact of (0.4)%QoQ. Sharp improvement in EBITDA margin.

Revenue growth in-line with expectations – Revenue grew 6.3%QoQ to Rs3,185mn. EBITDA margin improved 280bpsQoQ led by improvement in pricing, utilization rate and offshoring. Higher forex gain at Rs100mn and lower tax rate helped post higher-than-expected PAT of Rs538mn (35.9%QoQ growth). EPS for Q1CY11 was Rs1.8.

Europe outperforms US, which declined sequentially - US declined 0.2%QoQ, Europe has shown strong growth of 20.9%QoQ and RoW grew 13%QoQ on a smaller base. BFSI declined 0.4%QoQ but emerging segments grew
8%QoQ and TTHL grew 11%QoQ at a lower base.

Enterprise Application Services and Business Intelligence leads– Discretionary spending improving as Enterprise Application Services (EAS) and Business Intelligence Analytics grew strongly 13.6%QoQ and 13.7%QoQ, respectively. Testing grew 5.7%QoQ but ADM with highest contribution of 39% declined 1.4%QoQ.

Top client surges 26%QoQ; Utilisation increased but attrition still high – Top client grew 26%QoQ but top 10 clients grew just 4.9%QoQ. The smaller clients grew robust; non-top 10 clients grew 6.5%QoQ. Added 10 new and the total number of billed clients were 180. Utilisation increased 330bpsQoQ to 72.7% and attrition rate remained flat at 19.6%.

Outlook and valuation – Hexaware has given a robust USD revenue guidance of USD74.5-75mn (5.8-6.5%QoQ growth) for Q2CY11 and raised CY11 revenue guidance to 27.5%YoY. Utilisation rate touched the peak of 75.7% during the slowdown in CY09. SG&A at 23% is lowest after Q4CY06. We have increased the earnings estimates due to large forex gain (Rs100mn) in Q1 and similar number expected in Q2. We maintain ‘HOLD’ recommendation on the stock with a revised target price of Rs61 based on 9xCY12E earnings.