IPO Size: Rs. 8,750 cr

• Entirely Offer for Sale (OFS) by promoter Carlyle (95% stake to drop to 75%)

Price band: Rs. 674-708 per share

M cap: Rs. 42,976 cr, implying 20% dilution

IPO Date: Wed 12^th Feb to Fri 14^th Feb 2025, Listing Wed 19^th Feb 2025

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

IT Services Company, seeking to list after 2020 Delisting

Hexaware Technologies provides information technology (IT) services, with over 90% revenue coming from America and Europe.

Shares of the company were delisted by its former promoter Baring Private Equity in Sep 2020, after acquiring the company from founder promoter Atul Nishar in 2013. Current promoter Carlyle had purchased stake from Baring in 2021, at an effective cost of Rs.385 per share. Interestingly, Hexaware would clock 16-17% net margins under its founder, which has now contracted to 11-12% under the PE investors’ regime!

Adjusted Margins

Following a calendar year-end for financial reporting, Hexaware’s CY23 revenue rose 8% YoY to USD 1.26 billion, leading to a consolidated revenue of Rs. 10,380 cr and net profit of Rs. 998 cr, translating into a net margin of 9.6%. CY23 adjusted net profit stood at Rs. 1,133 cr, translating into 10.9% adjusted net margin. Company has adjusted margin for acquisition cost, regulatory fees, ERP implementation, employee severance among others. But adjusted margin is very unusual in the IT industry. Strangely, margins have been adjusted for all the periods i.e. CY21, CY22, CY23 and 9MCY24, despite being ‘one-off’. Such ‘financial engineering’ in the IPO document is not well received by the prospective investors.

9MCY24 revenue stood at Rs. 8,820 cr with net profit of Rs. 853 cr, but adjusted net profit of Rs. 1,018 cr. Reported and adjusted net margin stood at 9.7% and 11.5% respectively, same as CY21 adjusted net margin of 11.5%.

Unattractive Pricing

9MCY24 annualised EPS leads to a PE multiple of 38x, at upper end of the price band. While Hexaware is growing at 12% on a small topline of Rs. 11,000 cr, its net margin of 11% is lower than larger peers average net margin of 17-19%. The likes of TCS are growing at around 6% on a much larger base of nearly Rs. 2.5 lakh cr topline and yet trading at a PE of 28-30x.

Mid-cap IT stocks are more cyclical than larger peers and must be considered only for some niche domain expertise. Hexaware’s platforms (RapidX, Tensai) do not enjoy any such competitive advantage. Moreover, IT sector is facing challenges of lower spends in advanced economies and rapid advancement in new technology, keeping sector outlook tepid.

Promoter Exit

In the past 4 years since Carlyle’s parentage, Hexaware’s net profit rose at a 13% CAGR. But asking price implies a 20% IRR, considering \cost of Rs. 385 per share. This delta of 7% is unjustified for the bleak sector outlook.  

In addition, promoter being a financial investor, will definitely look to pare stake going forward, exerting an overhang on the stock price, with supply likely to be exceeding demand.