Is Hexaware Technologies IPO Worth It?
Hexaware Technologies’ return to the public markets is generating considerable buzz, especially with the promise of an offer for sale (OFS) amounting to ₹8,750 crore. The IPO is set to reduce the promoter’s stake significantly, with the promoter, CA Magnum Holdings (an affiliate of Carlyle private equity), slashing their ownership from 95% to around 75%. But what does this offer mean for investors, and is the valuation justified?
At first glance, the company’s growth seems strong—revenue has increased by about 60% since CA Magnum took control in 2021. Yet, the valuation of ₹43,000 crore, which is double the previous valuation of ₹23,000 crore, might be concerning given current industry challenges.
Let’s break down the factors investors need to consider before making a decision on the Hexaware Technologies IPO.
Hexaware Technologies IPO: A Quick Overview
The Hexaware Technologies IPO presents an intriguing yet complex opportunity for investors. Founded in 1990, Hexaware has become a significant player in the IT services sector. This return to the bourses is aimed at offering investors a chance to own a piece of a growing company in a fast-evolving industry. But with a valuation that’s hard to ignore, the question arises: is it too expensive?
Offer for Sale (OFS) Explained
The Hexaware IPO is structured entirely as an offer for sale (OFS), with ₹8,750 crore of shares up for grabs. CA Magnum Holdings, which currently owns 95% of the company, will reduce its stake to 75%. This marks a significant transition for Hexaware, which was previously taken private in 2020 by Barings PE. The question investors need to ask is whether the premium pricing justifies the growth potential.
Hexaware’s Financial Performance: A Mixed Bag
Revenue Growth: Impressive but Slowing
Since CA Magnum took control, Hexaware’s revenue has shown a notable increase—around 60%. In the last few years, the company’s revenue growth in 2022 was 28%, but this has slowed down considerably to a projected 12-13% in the current year. This decline raises concerns about Hexaware’s future revenue trajectory, especially in light of slowing demand post-COVID-19.
Profit Margins: The Underwhelming Reality
While Hexaware has managed to grow its profits, its margins are significantly lower than those of its larger peers. TCS and Infosys boast net profit margins of 19-20%, while Hexaware’s margins range between 9.5% and 10.5%. In a competitive industry like IT services, having higher margins is often an indicator of better positioning for growth. Unfortunately, Hexaware’s lower margins could limit its ability to compete aggressively in high-value contracts.
Valuation Concerns: Is the IPO Too Expensive?
The Valuation Dilemma: PE Ratio Under the Microscope
At a trailing Price-to-Earnings (PE) ratio of 41 times, the Hexaware IPO is priced at a premium. Even adjusting for certain one-off items mentioned in the Red Herring Prospectus (RHP), the adjusted PE still hovers around 35 times. Given the risks involved—such as slower growth and margin concerns—this valuation may feel expensive for investors.
However, despite this, the valuation of Hexaware is not completely out of sync with the broader IT services sector, where other companies are priced similarly or even higher. Nevertheless, for IPO investors, expensive peer valuation cannot be used as a benchmark.
Industry Landscape: IT Services and the Rise of AI
Disruption on the Horizon: The Impact of AI
One of the most pressing concerns for companies like Hexaware is the disruption posed by Artificial Intelligence (AI). While AI presents opportunities for efficiency and productivity in coding and IT operations, it also comes with risks. Clients may begin insourcing IT services or pushing for lower prices, negating the productivity benefits AI brings to the table.
In this dynamic landscape, Hexaware faces both opportunities and challenges. Its track record of over two decades in the IT services sector is strong, but the rise of AI means the company may have to rethink its strategy for long-term growth.
Geographical Exposure: Risks from North America
Hexaware generates a significant 73% of its revenue from North America. While this region has been resilient over the past few years, potential economic slowdowns, high interest rates, and inflation pose significant risks. With the US economy facing headwinds, Hexaware’s heavy reliance on North American markets could impact its performance.
Hexaware’s Business Segments: A Diverse Portfolio
Core Revenue Segments: Financial Services and Healthcare
Hexaware’s revenue is diversified across various sectors, with Financial Services contributing 28%, followed by Healthcare and Insurance (21%). These sectors are among the most lucrative for IT service providers. However, their vulnerability to economic cycles and AI disruption raises questions about future growth prospects.
Competition and Market Position
Hexaware’s primary competition comes from larger players like TCS, Infosys, and Wipro. Despite being a mid-tier player, Hexaware has managed to carve out a niche for itself, focusing on specialized industry expertise and competitive pricing. The company has also secured large deals, but its ability to compete with larger players in high-value contracts remains uncertain.
Is Hexaware a Long-Term Buy?
The Case for Waiting and Watching
Given the high valuation, investors may want to exercise caution and wait for a better entry point. Hexaware has a solid track record, but with the potential disruption from AI and slower growth in the US economy, it may be prudent to wait for more favorable conditions.
Frequently Asked Questions (FAQs)
1. What is the Hexaware Technologies IPO?
The Hexaware Technologies IPO is an offer for sale (OFS) of ₹8,750 crore by CA Magnum Holdings, reducing their stake from 95% to 75%. The IPO comes at a valuation of ₹43,000 crore, raising concerns about its expensive pricing.
2. Is Hexaware a good investment?
While Hexaware’s growth has been strong, its expensive valuation, slower growth rate, and lower profit margins compared to larger peers make it a risky investment at the current price.
3. Why is Hexaware’s valuation considered expensive?
At a trailing PE of 41 times, Hexaware’s IPO is priced at a premium, especially given the slowing growth and potential risks from AI disruption and economic slowdown.
4. How much of Hexaware’s revenue comes from North America?
Hexaware derives 73% of its revenue from North America, making the company highly exposed to potential economic risks in the region.
5. What industries does Hexaware focus on?
Hexaware has a diversified revenue base, with significant exposure to Financial Services (28%), Healthcare and Insurance (21%), Manufacturing and Consumer (17%), and Hi-Tech and Professional Services (16.9%).
6. What are the growth prospects for Hexaware?
Hexaware’s growth has slowed, with a projected 12-13% revenue growth this year. While the global IT services market is growing, Hexaware’s exposure to AI disruption and economic slowdown may hinder its ability to match industry growth rates.
Conclusion: Should You Invest in Hexaware Technologies IPO?
While Hexaware Technologies has displayed impressive growth since its acquisition by CA Magnum Holdings, its high valuation and exposure to industry risks make the IPO a challenging decision for investors. The slowdown in revenue growth, lower profit margins, and looming disruption from AI are all factors to consider before jumping in.
For those seeking exposure to the IT services sector, Hexaware may be an attractive option—but only at a lower valuation. Investors should closely monitor market conditions and the company’s future performance before making any decisions.
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