The sharp fall in stock price in the last nine months was a major reason for upgrade by research house
Hexaware Technologies shares gained 2.6 percent intraday on June 17 as Japanese brokerage Nomura upgraded to the company to 'neutral' from 'reduce' after the acquisition of Mobiquity.
The sharp fall in the stock price in the last nine months was a major reason for the upgrade by research house, which also increased the target price to Rs 340 from Rs 325 earlier.
The stock fell 25 percent in last nine months. It was quoting at Rs 351.75, up Rs 7.10, or 2.06 percent on the BSE at 1021 hours IST.
"We upgrade Hexaware to neutral, driven by: 1) what we view as reasonable valuation of around 15x FY20F EPS; and 2) our positive view on the acquisition of Mobiquity Inc. (around 11 percent of revenues), which provides capabilities in a fast-growing digital customer experience market (growing at around 20 percent plus CAGR)," Nomura said.
"However, what keeps us from being more positive are: 1) large exposure to capital markets and mortgage business in BFSI (around 40 percent of revenues), where we see pressure going into FY19; 2) loss of business in a large net new deal that will impact growth in FY20; and 3) margin pressures led by supply-side issues, high attrition levels and a margin-dilutive acquisition," it added.
On June 14, Hexaware acquired US firm Mobiquity Inc for around $182 million, to directly compete with large digital agencies and consulting firms.
Mobiquity, headquartered in the US and present across three continents, creates digital products for some of the most well-known brands in the world, such as Amazon Web Services, Rabobank, Philips, Wawa, Backbase and Otsuka. Mobiquity specialises in creating frictionless multi-channel digital experiences using cloud technologies.
Nomura likes the acquisition of Mobiquity, as: 1) it adds capabilities in the faster-growing digital customer experience transformation market and strengthens company's position in two of its three focus areas of customer experience and cloud; 2) it provides significant cross-sell synergies given complementary capabilities, 3) gives access to a marquee client base including AWS, Rabobank, Philips, and Backbase, with minimal client overlap; and 4) it is at what we consider an attractive valuation of 2.6x trailing sales, an EBITDA profitability level similar to that of Hexaware.
Key risks include below-expectation growth due to pressures in BFSI and margins, it said.
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