Hexaware Technologies IPO analysis

Hexaware Technologies IPO (initial public offering) will open for subscription on February 12, 2025, and close on February 14, 2025. Below is a breakdown of the IT service provider's strengths, weaknesses and growth prospects to help investors make an informed decision.

Hexaware Technologies IPO in a nutshell

• Quality: Between 2021 and 2023, Hexaware Technologies reported a three-year average ROE and ROCE of around 24 and 26 per cent, respectively.
  
• Growth: Between 2021 and 2023, its revenue and net profit grew annually by 20 per cent and 15 per cent, respectively.
  
• Valuation: At the upper price band of Rs 708, the stock is expected to be valued at a P/E and P/B ratio of around 41 and 8 times, respectively.
  
• Overview: Hexaware Technologies stands to benefit from the steady expansion of the global IT services sector, fueled by increasing enterprise adoption of cloud computing, artificial intelligence (AI) and digital transformation. However, as a mid-sized IT services provider, it faces stiff competition from established players like Coforge , Persistent Systems , LTIMindtree and Mphasis .

About Hexaware Technologies

Incorporated in 1992, Hexaware Technologies assists companies in adopting digital solutions, automating processes and providing AI-driven insights for smarter decision-making. Its services span software development, IT security and management, data and AI solutions, business process optimisation and cloud adoption.

Hexaware operates 39 delivery centres and 16 offices across the US, Europe and the Asia Pacific as of September 30, 2024. The company generates nearly 72 per cent of its revenue from the US and 22 per cent from Europe. The financial services sector contributes 28 per cent to its revenue, while healthcare and insurance account for 21 per cent.

Strengths of Hexaware Technologies

• Long-standing client relationships: Hexaware's top 10 clients have been associated with the company for nearly 15 years. The company also serves 31 Fortune 500 organisations.

Weaknesses of Hexaware Technologies

• Customer concentration risk: The company derives nearly 50 per cent of its revenue from its top 20 customers. Any loss of key clients could have an adverse effect on the business.
  
• Low barriers to entry: The IT services industry is highly competitive, with numerous players vying for market share. Additionally, low entry barriers make it easier for new competitors to enter the space, intensifying the competition.

Risk report

Company and business

• Did Hexaware Technologies report earnings before tax of Rs 50 crore or more in the last 12 months?
  Yes. The company reported earnings before tax of Rs 1,383 crore for 12 months ending September 2024.
  
• Will the company be able to scale up its business?
  Yes. The global IT services and business process services (BPS) market is projected to reach Rs 343 trillion by 2029, with IT services expected to grow at an annual rate of 7.2 per cent and BPS at 2.5 per cent. This favourable industry outlook could support Hexaware's growth.
  
• Does the company have recognisable brands with client stickiness?
  Yes. The company has long-term relationships with its top customers, with an average relationship tenure of 15 years with the top 10 customers.
  
• Does the company have a credible moat?
  No. Hexaware Technologies competes with numerous large and small IT service companies, and its offerings can be replicated by competitors.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. After the IPO, the promoters will have a 75 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at Hexaware Technologies?
  No. The top three managers have less than 15 years of combined leadership experience in the company.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Hexaware Technologies free of promoter pledging of its shares?
  Yes. The promoters have not pledged their shares.

Financials

• Did Hexaware Technologies generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. It has a three-year average ROE and ROCE of around 24 and 26 per cent, respectively. In 2023, it reported an ROE and ROCE of nearly 25 and 29 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flow from operations during the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of September 30, 2024, the company's net debt-to-equity ratio stood at -0.16 times.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  Yes. IT services companies typically have minimal inventory and low capital expenditure (capex) needs, reducing the reliance on large working capital.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. With positive operating cash flow and negligible debt, Hexaware appears well-positioned to operate without external funding for the next three years.
  
• Is the company free from meaningful contingent liabilities?
  Yes. The company did not have any contingent liabilities as of September 30, 2024.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 3 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 41 times compared to its peers' median level of 56 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 8 times compared to its peers' average level of 10 times.

Assessing an IPO requires carefully evaluating a company's strengths, weaknesses and growth potential, just like we've outlined for Hexaware Technologies. However, wealth creation can only be achieved through a well-researched, balanced stock portfolio.

Our Value Research Stock Advisor can help with that. What do you get? Meticulously researched stock recommendations and ready-to-invest portfolios, updated every month. Subscribe to Value Research Stock Advisor today and take charge of your financial future.

Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

Also read: Should you invest in IPOs?