Hexaware Technologies is set to debut on Indian stock exchanges today, February 19. The issue was subscribed 2.79% and the brokerage firm JM Financial has initiated coverage on the company with a ‘Buy’ rating and a target price of Rs 820, implying a 16% upside from the upper end of the IPO price band of Rs 708.
According to JM Financial, Hexaware’s transformation began over a decade ago when Keech and Barings PE took over. The brokerage said, “Their strategy of going after scalable clients with a wider bouquet of services has helped them hunt as well as farm well.”
Furthermore, the brokerage in its report highlighted that Hexaware has evolved into a mature framework that should yield consistent results in the coming years. It projects an earnings per share (EPS) compound annual growth rate (CAGR) of approximately 20% over CY23-26E.
JM Financial on Hexaware Tech: Comparisons with Coforge
According to the brokerage firm, Hexaware’s transformation blueprint is similar to Coforge’s. Both companies have expanded their service offerings and prioritized verticals and clients with larger tech outsourcing budgets.
“HEXW, like Coforge, expanded service offerings and prioritized verticals/clients with larger tech outsourcing spend while diversifying from sub-scale ones such as travel,” said the brokerage in its report.
JM Financial on Hexaware Technologies: Steady growth despite challenges
The brokerage firm projects 12% USD revenue CAGR over CY24-26E, with EBITDA margins expanding by 158 basis points due to reduced non-recurring expenses.
“We build in 12% USD revenue over CY24-26E. 158 bps EBITDA margin expansion, led by tailing off of non-recurring expenses, should drive 20% EPS CAGR over the same period,” added the brokerage in its report.
JM Financial on Hexaware Technologies: Financial trends and performance
Hexaware has consistently outperformed most peers, registering a 10-year USD revenue CAGR of 12.5%.
The brokerage firm projects a CY23-27E revenue CAGR of 12.9%, maintaining its long-term growth trajectory. The company has also noted a cash conversion, with an average operating cash flow to EBITDA ratio of 83% and a free cash flow to profit after tax ratio of 99% (excluding acquisitions) over CY13-23.
JM Financial on Hexaware Technologies: Valuation and risks
JM Financial values Hexaware at 30x its 24-month forward EPS, at a 10% premium to the average FY26E price-to-earnings ratio (PER) of the mid-cap IT sector.
However, it remains at a 25% discount to Coforge’s current multiples. The firm notes that at the time of delisting, Hexaware traded at a 20% discount to Coforge, and given Coforge’s accelerated growth (32% EPS CAGR for FY24-27E vs. 16% for Hexaware), the discount appears justified.
A key risk highlighted by JM Financial is the potential headwinds in Hexaware’s top five accounts, particularly Fannie Mae, a top-three client. In addition to it, Carlyle’s 75% stake in Hexaware could create an overhang on valuations as future monetization remains a possibility.
The brokerage projects Hexaware’s EBITDA margin to reach 17.1% by FY27E, expanding by 170 basis points over CY23-27E.
JM Financial adds, “We believe Hexaware has multiple traditional levers still to pull such as offshoring, utilization, sub-con, and pyramid; and reduction in one-off expenses aiding reported margins by 50bps.”
Hexaware Tech IPO details
Hexaware Technologies opened its IPO for bidding from February 12 to 14, with a price band of Rs 708 per share. The IPO saw a subscription of 2.79 times on the final day, with QIBs subscribing 9.55 times, retail investors 0.11 times, and non-institutional investors 0.21 times.
Ahead of the IPO, the company raised Rs 2,598 crore from anchor investors on February 11. The IPO, a book-built issue worth Rs 8,750 crore, was entirely an offer for sale, involving 12.36 crore shares.