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Hexaware + KPIT Cummins downgraded by Citi

April 29, 2008

Tier-II Software Companies, Hexaware Technologies and KPIT Cummins Infosystems have been downgraded by Citi to a SELL.

Hexaware:
Hexaware reported revenue of US$67m (exp. of US$69m). Lower SG&A spend led to net profit of Rs209m (exp. of Rs211m). Out of the last 5 quarters, headcount has declined in 3; even next quarter hiring outlook is muted – this does not inspire confidence on the outlook for rest of the year. New order booking during Q1 was US$42m (~US$70m in 4Q and US$270m+ in CY07).

Hexaware has guided to $310-315m revenue in CY08. Consensus estimates are ~15-20% higher than CIR estimates despite cuts over last few quarters. There is a clear risk to consensus estimates. Citi has reduced CY08/CY09 estimates by ~13% on account of: (1) Weak 1Q; (2) Impact of vendor, consolidation/lower IT spend by top few clients; (3) Weak order bookings; (4) No recovery in Peoplesoft related revenues; and (5) Challenging macro environment. Citi maintains a SELL with a target price of Rs 70.

KPIT Cummins Infosystems:
In its last quarterly conference call, management had indicated that it had forex hedges of ~US$20m for FY08 but did not mention these cross-currency hedges. The M2M loss of Rs893m is ~32% of company’s net worth (as at the end of last quarter) and ~1.6x FY08E net profit.

Management has not yet finalized the accounting treatment for the loss. If M2M losses are accounted for in FY08 earnings, they may not materially impact future year’s earnings. Management has indicated that it has not closed these transactions; hence, there could be potential upside/downside.

Citi is cutting our target P/E to 10x from 12x and downgrade the stock to Sell/High Risk with a price target of Rs 92.

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