The share price of Hexaware Technologies has gone down by 24% in the last six months. This is not the first Atul Nishar-promoted company we have seen come crashing down

The operating margins of Hexaware Technologies have been highly volatile in the past. According to a research report from Espirito Santo, the company’s service portfolio is not big enough a differentiator to drive sustainable growth. The research report also cites that not only the company’s margins have been highly volatile in the past, it has also fallen from 20% to low single digits twice in the last six years.
 

Companies promoted by Atul Nishar have had a chequered history. He set up Hexaware Technologies in 1990 from the demerged software arm of Aptech. Following the shakeout in the software sector after 2001, Aptech demerged its software business. The ownership itself changed hands from Atul Nishar in 2003 and was substantially acquired by a group of independent investors led by Rakesh Jhunjhunwala a few years later. Then there is the now defunct non-banking finance company (NBFC), Apple Finance which is promoted by the Atul Nishar-owned Apple Industries group and was engaged in leasing and hire purchase. Apple Finance failed to pay the banks a total principal amount of Rs75 crore and accrued interest for the debentures they held.
 

Is Hexaware fraught with the same management issues?  The recent cut in its CY12 revenue and its margin guidance surprised the market, but Hexaware also faced these client specific issues in CY08 and CY10, according to the research report. Investors had bought the stock on the back of high growth prospects, improving margins and a high dividend yield. However, with Hexaware’s intent to make an acquisition of $40 million to $60 million and with this cut in revenue and margin guidance, all the main support arguments for the stock have crumbled, mentions the research report.
 

Hexaware has seen EBITDA margins drop to mid-single digits twice in the last six years. Dividends too, were not sustainable. The company announced a 20% dividend cut in Q3CY12. The research firm expect a further cut by another 20% or so due to reduced profitability.
 

“Our concerns are more about the ability to generate growth from existing clients, rather than its ability to win new deals,” says the report. The company’s revenues stagnated from Q2CY07 to Q3CY08 due to client specific issues, and declined from Q4CY08 to Q1CY10 as its top client materially cut spending. The growth since then has been driven by winning large deals from its existing top-10 clients. In the period when its revenues stagnated or declined Hexaware faced severe margin pressures, with margins dropping to the low single digits.