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Hexaware+Sasken + KPIT Cummins Downgraded

August 9, 2007

Citigroup Research has downgraded Hexaware Technologies Ltd [Formerly Aptech], Sasken Communications and KPIT Cummins Ltd.

Hexaware Technologies:
Company reported 2Q07 results – revenue of Rs.2.62b (-1% qoq) and net profit of Rs.261 m (-26% qoq) – was disappointing and significantly below our expectations on net profit.

Company clearly lacks margin levers especially when it had triple whammy – a) Strong INR, b) wage hikes (higher than usual) and c) tepid sales outlook due to client specific issues. Revise estimates now factor weak 2Q, cloudy outlook from a few clients and integration issues at FocusFrame – we cut our earning estimates by 11-18% for CY07-09. With lower earnings CAGR, Hexaware is now valued at 15x CY09E EPS (against 17x earlier) – thus, new target price is Rs.155 from Rs.214 earlier.

Sasken Communications Limited:
Sasken’s 1QFY08 numbers came in below street expectations. Services revenues grew only 2% qoq ($ terms) while margins declined sharply by ~800bp sequentially. Product business had an inline quarter – revenues ($2m) were in line with expectations.

Management cut the guidance for services revenues – 20-25% growth in $ terms as against the 30-35% guidance earlier. This implies $132 – 137m of revenues (against $100m in FY07). EBITDA margin outlook was reduced to 15-17% from the earlier 20-23%.

The disappointing 1Q results, weakness in telecom services and higher than expected INR impact has resulted in a 24% and 12% cut in FY08 and FY09 estimates. Revised target price is Rs.505 (from Rs.643) as the services business is now valued at 10x EV/EBITDA (against 11x earlier) to reflect lower earnings growth and deteriorating comparable valuations for mid-cap Indian IT.

KPIT Cummins Limited:
Company reported 1Q08 results – revenue of Rs.1.35b (+3.8% qoq) and net profit of Rs.127 m (-10% qoq) – was broadly in-line with expectations. Recognizing revenue at hedged rate, inflates revenue figure and EBITDA line in appreciating quarter.

KPIT Cummins recognizes revenue at hedged rate (against spot rate done by several other Indian IT companies) – this recognizes hedging gains/losses with revenue. lower our earnings estimates by ~7-10% for the delayed currency impact and amortisation of upfront payment.

New target price of Rs.154 (earlier Rs 180) is based on 15x FY09E EPS (against 16x earlier) to factor in lower earnings growth. Stock trading at 17x FY08E and 12x FY09E earnings.

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