Sitting pretty: Hexaware Tech scouts for acquisitions

Mid-tier IT companies are in a tight spot as they are not sure which road to take. While they continue to grow at a steady pace, they are not able to grow bigger in leaps. Big-tier companies like Infosys Technologies, Wipro and HCL continue to pip them in terms of revenue and profit growth.

The stock market does not offer a higher price-earnings multiple to mid-tier companies as a result. For example, the average expected price-earnings multiple for the IT sector in financial year March 2012 is 19. Companies like Hexaware Technologies, Tech Mahindra, Mphasis and MindTree continue to get a multiple of 11-13 times expected March 2012 earnings.

[caption id=“attachment_19219” align=“alignleft” width=“380” caption=“Mid-tier cos need to figure out a way to deploy their strengths on the balance sheet or big-tier cos will continue to pip them in terms of revenue and profit growth. Photo by Sourabh Massey”]  [/caption]

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Some of the mid-tier firms are sitting on a pile of cash reserves and are practically debt free. Therefore, it is imperative that these companies figure out a way to deploy their strengths on the balance sheet to boost their future revenue.

Hexaware Technologies, a BSE-listed Rs1,982-crore IT company is looking for acquisitions. A peak at its balance sheet shows that the company is sitting on a cash pile of Rs452 crore and is virtually debt-free. Sreenivas V, Chief Strategy officer told Firstpost that the company is looking for acquisitions in the remote Infrastructure Management Services (IMS) space and the BPO space with a preference in the offshore (India) segment. Till then, it is “happy to keep the cash in the bank”.

In the past too, the company was scouting for acquisitions but nothing substantial materialised. Many deals had moved on to the second and third phase but had to be cancelled as the synergies did not fit .

The company has a fairly stringent acquisition criteria, said Sreenivas. Its last and only acquisition was in November 2006 when it acquired the US-based software testing frame company called FocusFrame for $34.3 million.

Revenue was almost flat at Rs 1,054 crore for the year ended December 2010 compared to Rs1,038 crore for the year-ended December 2009. For the year 2011, the company has given a very bullish guidance as it expects revenues to jump by 27.5% to $295 million (Rs 1,327 cr approx).

Hexaware derives 66% of its revenues from the USA and 28% from Europe.

Its share price bucked the overall sluggish trends as it gained a whopping 72% compared to the BSE IT sector index that rose by 6% over the past one year. Institution holding stood at 48%, more than the promoter holding of 28.4%. General Atlantic and Fidelity hold a 7.28% and 8.94% stake, respectively in the company.

This list below is a good rule of thumb to examine Hexaware, depending on the hat you feel like wearing.

If you are a shareholder / retail investor looking to pick your stock watch out for the following:

• Co is sitting on cash pile of Rs452 crore

• Bagged an order of $25 million from an existing client in May 2011

• Virtually debt-free

• Bullish guidance for 2011, revenues to rise by 27.5% in dollar terms

• Share of revenues from new clients increased to 6.8%, highest in the last 12 months

• Secured a $110-million contract in the June 2010 quarter

Banks/lawyers/consultants/private equity players, please note

•Co to focus on adding clients who contribute more than $1 million

• Keen on acquiring companies in the remote IMS and BPO space

• Capex for 2011 is at Rs70 crore

• Interested in acquiring companies that have a topline of $25-50 million in a year

Employees check this out

• Attrition rate was flat at 19.6% for the quarter ended March 2011 compared to December 2010

• Employee strength increased by 2.3% to 6,664 for the March quarter against 6,511 in the December quarter

• Wage bill to increase in line with industry trends

• Co plans to hire 150 employees for the new contract added

• Board approved the grant of 60,000 options under ESOP to employees at a price of Rs 69.95 per share