The IT sector stocks have been under pressure lately. The Nifty IT Index is down over 1% in the last 1 week, and Hexaware Tech, a key midcap tech company, slumped over 4%. However, Jefferies initiated coverage with a Buy rating. They believe that Hexaware offers the growth characteristics of a mid-sized IT firm with a well-diversified business mix and quality metrics rivalling large IT firms. They have a target price of Rs 930 per share. This implies nearly 27% upside for the Hexaware share price from current levels.
According to Jefferies, “strong client additions, platform-led legacy modernisation and expansion in new verticals/regions support the premium valuations.” They expect superior quality with healthy growth, which should enable “10%/15% annualised growth in revenue/EPS over CY25-CY27 and see 31x forward PE growth.”
Jefferies on Hexaware: Diversified revenue mix supports valuation
Hexaware offers end-to-end IT services across four service lines and six industry verticals. The North America region accounts for 74% of sales, and the banking and financial services contribute 37% of revenues. Moreover, “13% revenue growth over the past five years has been equally driven by new client additions and mining of existing client relationships.” This is a key positive, as per Jefferies. “When compared to other mid-sized IT firms, Hexaware’s revenue mix is more diversified across verticals as well as clients,” they added.
Jefferies on Hexaware: Growth pace to jump going forward
Jefferies sees Hexaware “well positioned to grow revenues at 10% annually between 2025-2027.” This according to the international brokerage is on account of a “balanced vertical mix, focus on quality client additions and strong client mining track record.” This has enabled the tech company to deliver 12/13% revenue growth on a compounded basis over the past 10/5 years.
Jefferies on Hexaware: Big growth triggers
While they do not rule out moderation in growth this year and see it dipping “to 7% levels due to weak macro and client-specific pressures,” they expect “Hexaware’s growth to revert to 10% CAGR over CY25-CY27.” This, according to them, would be the third highest in the industry. The big triggers for these are “platform-led approach, legacy modernisation, expansion in geographic reach, Hi-Tech vertical, and scale-up of the GCC practice”
Jefferies on Hexaware: Margins seen at 15% levels
The focus on growth, Jefferies pointed out, will also help “improving onshore-offshore mix and employee pyramid are longer-term margin levers.” According to their estimates, Hexaware is likely to focus on growth rather than expand margins. They expect “EBIT margins to expand by 70 bps over 2025-2027 and reach 15.3% by 2027. This, according to them, is “primarily due to ERP transformation costs discontinuing from 2026. This will drive a 14% EBIT CAGR and 15% profit growth annually on a compounded basis over CY25-CY27.”
Jefferies on Hexaware: Potential restructuring on cards?
According to Jefferies, “Hexaware offers the growth characteristics of a mid-sized IT firm with the quality similar to larger IT firms.” It boasts of the 5th highest ROE, the 4th highest free cash flow conversion, and lower variability in growth, they pointed out. However, the “potential restructuring/privatisation of its 2 large US clients is a risk, and paring of stakes by dominant shareholders may keep the stock price volatile.” But Jefferies reiterated that “Hexaware’s superior quality justifies its 15% premium to Mphasis.”