Hexaware Technologies (HT) is a global digital and technology services leader with artificial intelligence (AI) at its core. It specializes in delivering innovative, AI-enabled solutions that empower organizations on their digital transformation journeys. Its portfolio includes advanced platforms and tools designed to help clients adapt, innovate, and optimize in the AI-first era.

The company operates through six key industry-focused segments namely financial services, healthcare and insurance, manufacturing and consumer, hi-tech and professional services, banking, and travel and transportation. Its five core service categories include design & build, secure & run, data & AI, optimize, and cloud services which form the backbone of its offerings. The company delivers its services through proprietary platforms including RapidX™ for digital transformation, Tensai® for AI-powered automation, and Amaze® for cloud adoption.

As of 30 September 2024, the company’s global network includes 39 delivery centers and 16 offices spanning the Americas, Europe, and APAC regions. It employs 32536 professionals across 28 countries. This expansive presence allows it to serve diverse markets, including 31 Fortune 500 clients.

HT was first listed on June 14, 2002, according to NSE data, but was later delisted in 2020 by its previous promoter, Baring Private Equity Asia (now EQT). In 2021, Carlyle’s through CA Magnum Holdings acquired HT for approximately US $3 billion.

Object of the offer

The IPO comprises an entire offer for sale (OFS) of 123587571 equity shares at higher price band.

The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders (CA Magnum Holdings).

CA Magnum Holdings share holding will reduce to 74.7% of the total share holding from the earlier 95.05% post IPO.

Strengths

The company provides comprehensive services and solutions to customers across six industries. It leverages its deep expertise across its comprehensive portfolio of services, in-depth domain knowledge, and understanding of customer requirements to contextualize the use of different technologies and to help its customers develop and deploy their digital transformation strategies.

The company has leveraged its domain expertise to develop three AI-enabled digital platforms that create value for its customers across its service offerings. Its platforms include (1) RapidX™, for digital transformation, (2) Tensai®, for AI-powered automation and (3) Amaze®, for cloud adoption.

The company serves a diverse range of customers, including 31 of the Fortune 500 organization. The company has longstanding relationships with many of its customers, with the average tenure of its relationships with its top5, 10 and 20 customers for the financial year 2023 being approximately 15, 15 and 12 years.

The company is focused on developing relationships with new customers across the Americas, Europe and APAC through collaborative engagement and the same is achieved through its go-to-market strategy, which combines the efforts of its new customer acquisition, account management, hybrid sales and overlay sales teams. The company prioritizes acquiring large enterprises with substantial IT budgets and long-term growth potential as customers and in the financial year 2023, it derived approximately 62% and nearly 83% of its revenue from operations from customers with over US$5,000 million revenues and over US$1,000 million revenues, respectively.

HT has a global delivery presence, which allows it to provide innovative solutions to its customers in a flexible and cost-effective manner, by leveraging platforms through its talent pool and an efficient onshore-offshore service delivery mix. Proximity to customers enables the company to address changing customer needs in a timely manner.

Weaknesses

The company derived 73.4% and 71.5% of its revenue from operations from the Americas and 20.5% and 22.1% of its revenue from operations from Europe for the nine months ended September 30, 2024, and the Financial Year 2023, respectively. Any adverse changes in economic conditions that negatively affect the economic health of the geographies and markets in which the company has a presence could affect its business.

The company’s success depends in large part upon the strength of its skilled IT professionals and management team. If the company fails to attract, retain, train and optimally utilize these personnel, its business may be unable to grow and may have an impact on revenues and profitability. Further, increases in wages and other employee benefit expenses for such personnel could prevent the company from sustaining its competitive advantage.

A reduction in the outsourcing budgets by the existing and prospective customers could affect the company’s pricing and volume of work.

If the company cannot maintain and expand its existing customer base, the company’s financial condition will be impacted.

The company transacts a significant portion of its business in foreign currencies, primarily the US dollar, the British Pound, the Euro and the Mexican Peso. Accordingly, changes in exchange rates may have a material adverse effect on the company’s profitability and margins.

The company is vulnerable to cyber-attacks, computer viruses, ransomware and electronic break-ins which could disrupt its operations.

The company’s business is subject to evolving laws regarding privacy, data protection and other related matters. Manyof these laws are subject to change and could result in claims, changes to the business practices, monetarypenalties, increased cost of operations, or declines in customer growth or engagement, which may harm the company’s business.

Valuation

For the nine months ending September 2024, consolidated sales were up by 13.6% to Rs 8820.0 crore. OPM declined 91 bps to 15.19% which led to a 7.2% increase in operating profit to Rs 1339.80 crore.The other income increased to Rs 51.3 crore. Interest cost increased48.0% to Rs 45.30 crore and depreciation increased 6.7% to Rs 202.5 crore. PBT increased by 11.2% to Rs 1143.30 crore. Tax expenses increased by 29.6% to Rs 290.0 crore. Net profitafter minority interest stood at Rs 857.5 crore as against net profit of Rs 804.80 crore of corresponding period of previous year.

For FY 2023(January to December), consolidated sales were up by 12.8% to Rs 10380.30 crore. OPM rose 195 bps to 15.23% which led to a 29.4% increase in operating profit to Rs 1581.10 crore. OIdeclined 95.1% to Rs 8.80crore while interest cost inclined 12.8% to Rs 37.8crore and depreciation increased 16.0% to Rs 283.6 crore. PBT increased by 13.0% to Rs 1268.50 crore. Tax expenses increased by 13.4% to Rs 270.90 crore. Net profit stood at Rs 997.6 crore as against net profit of Rs 884.2crore in FY2022.

At the higher price band of Rs 708, the offer is made at a P/E of 41 times the TTM (till September 24) EPS (of Rs 17.28).

Listed industry peers of the company are Coforge, LTIMindtree, Mphasis, and Persistent Systems. In comparison Coforge trades at 71.91 times its P/ TTM EPS, LTIMindtree trades at 38.64 times its P/TTM EPS, Mphasis trades at 26.65 times P/TTM EPS and Persistent Systems trades at 73.15 times theirP/TTM EPS.