Hexaware’ billion-dollar IPO: A landmark return to the bourses

The much-anticipated IPO, which opens on 12 February and closes on 14 February, marks the company’s return to the public market after it was taken private in 2020. The offering is expected to be India’s largest IT IPO since Tata Consultancy Services Ltd (TCS) debuted on the public markets in 2004 with a ₹4,713 crore issue.

Hexaware’s IPO price band has been set at ₹674-708 per share. The entire offering will be an offer for sale (OFS) by the promoter, CA Magnum Holdings, a subsidiary of private equity firm Carlyle Group. This means that all proceeds will go to the selling shareholder and not Hexaware itself. The firm’s anchor investor allocation will be determined on 11 February, while the stock’s listing on BSE and NSE is scheduled for 19 February.

With Hexaware’s shares reserved across investor categories, retail investors will have access to 35% of the issue, while qualified institutional buyers (QIBs) and non-institutional investors (NIIs) will receive 50% and 15%, respectively. Eligible employees will benefit from a ₹67 per share discount, with ₹90 crore worth of shares reserved for them.

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A digital powerhouse with AI at its core

Founded in 1992 and headquartered in Navi Mumbai, Hexaware Technologies has built a reputation as a key player in India’s IT services and business process outsourcing (BPO) industry. The company operates across six major sectors: financial services, healthcare and insurance, manufacturing and consumer, hi-tech and professional services, banking, and travel and transportation.

Hexaware’s services are structured under five broad categories: Design and build, secure and run, data and artificial intelligence (AI), optimize, and cloud services. The company heavily leverages AI and cloud computing to deliver cutting-edge solutions.

Proprietary platforms such as RapidX (for digital transformation), Tensai (for AI-driven automation), and Amaze (for cloud migration) have been instrumental in differentiating its service offerings. It has a global presence spanning 39 delivery centers across the Americas, Europe, and the Asia-Pacific region, serving 31 Fortune 500 companies and posting consistent revenue growth.

Premium valuation but strong financials

Hexaware’s financial performance has been robust. For the fiscal year ended 31 December 2023, Hexaware reported a revenue of ₹10,389.1 crore ($1.25 billion) and a net profit of ₹997.6 crore, reflecting strong momentum despite macroeconomic headwinds. About 73.4% of its revenue came from the Americas, while Europe contributed 20.5% and the Asia-Pacific region the remaining share.

Over the past three years, Hexaware’s dollar revenue, rupee revenue, and profit after tax have grown at a compound annual growth rate of 14%, 20%, and 15%, respectively. Additionally, margins on its earnings before interest and tax have remained stable despite challenges in discretionary IT spending by its clients.

However, valuation concerns loom over Hexaware’s IPO. At the upper end of the IPO price band ( ₹708 per share), Hexaware is valued at ₹43,025 crore, translating to a price-to-earnings ratio of 43.1 times for 2023 and 37.6x for 2024. While this valuation is relatively cheaper than those of Persistent Systems (84x) and Coforge (64x), it is pricier when compared with LTIMindtree (38x) and Mphasis (34x).

Some analysts argue that these valuations leave little margin of safety for investors, especially amid industry-wide concerns over AI-driven disruptions and macroeconomic uncertainties in Hexaware’s key markets—the US and Europe.

Hexaware’s growth strategy and expansion plans

Hexaware has laid out an ambitious roadmap for future growth, focusing on AI-driven solutions, cloud transformation, and expanding its offshore delivery capabilities. The company has been actively expanding into tier 2 cities in India, opening delivery centers in Ahmedabad, Coimbatore, and Dehradun, to tap into lower-cost talent pools and enhance margins.

Hexaware’s chief executive Srikrishna Ramakarthikeyan said recently that Hexaware aimed to increase its market share among larger enterprises, with a focus on clients that have revenues exceeding $5 billion—such clients currently contribute 62% of Hexaware’s total income.

“This percentage means that we are relevant to each other. importantly, there’s headroom for us to grow,” he said.

“Also, our customer pyramid has changed. That’s the best evidence of us increasing market share over a period of time. On a three-year basis, the number of clients who give us about $20 million has almost doubled,” Ramakarthikeyan said. “The number of clients who give us $10 million has gone from 19 to 20 customers.”

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Strategic acquisitions have played a crucial role in Hexaware’s expansion strategy. Recent acquisitions include Minneapolis-based Softcrylic, which bolstered Hexaware’s data analytics and marketing technology capabilities.

The company continues to explore acquisition opportunities, particularly in Latin America and Eastern Europe, to enhance its service portfolio and geographic footprint. Additionally, Hexaware’s focus on generative AI and automation is expected to drive operational efficiencies and improve client offerings.

Navigating a crowded IT battlefield

Hexaware Technologies operates in a fiercely competitive IT services landscape, where it faces both established global titans and agile mid-sized challengers.

Industry behemoths such as TCS, Infosys, and Wipro dominate the market with their vast client base, deep enterprise relationships, and broad service offerings. Mid-tier rivals such as Coforge, LTIMindtree, and Mphasis are also aggressively expanding their digital and AI-driven capabilities, intensifying the battle for high-value contracts.

Unlike its larger peers, Hexaware has carved a niche with its AI-led automation, cloud transformation, and industry-specific solutions, particularly in financial services, healthcare, and professional services. The firm’s focus on mid-to-large enterprises—where it has steadily increased its wallet share—sets it apart in an industry where differentiation is key.

However, with pricing pressures, AI-driven disruptions, and evolving client expectations reshaping the IT landscape, Hexaware’s ability to sustain growth and profitability hinges on its execution prowess and continued investments in innovation.

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Challenges and industry risks

While Hexaware is well-positioned for growth, it faces several risks. The economic slowdown in its key markets, particularly in the US and Europe, poses a significant challenge. Any downturn in discretionary IT spending by clients could impact revenue growth.

Also, the rise of GenAI and automation could disrupt traditional outsourcing models, leading to pricing pressures. Currency fluctuations and geopolitical risks also play a crucial role in determining Hexaware’s profitability, given its extensive global operations.

Muted grey market premium and market sentiment

Despite Hexaware’s strong fundamentals, its grey market premium (GMP) has been subdued. Hexaware’s GMP has fluctuated between ₹8 and ₹19 per share, suggesting minimal listing gains of around 1.13% over the IPO issue price.

This tepid response in the grey market raises concerns about demand from retail investors, although institutional participation remains a critical factor in determining the final subscription levels. The company was delisted in 2020 at a valuation of ₹23,000 crore, and since then its value has nearly doubled under Carlyle’s ownership, reflecting the firm’s growing influence in the IT sector.

Should you subscribe to Hexaware’s IPO?

Brokerages have given mixed opinions on Hexaware’s IPO. SBI Securities has recommended subscribing with a long-term perspective, citing Hexaware’s AI-driven capabilities and diversified revenue base. “We recommend subscribing to the issue at the cut-off price with a long-term investment horizon,” said SBI Securities.

Investors should weigh Hexaware’s strong fundamentals, growth potential, and industry positioning against valuation concerns and the broader macroeconomic landscape. The Hexaware IPO’s final subscription numbers and institutional participation will serve as key indicators of market sentiment.

As Hexaware Technologies gears up for its market comeback, it remains to be seen whether the IT firm can justify its premium pricing and sustain its growth momentum in an increasingly competitive and AI-driven landscape. Hexaware’s public market listing on 19 February will be a critical test of investor confidence in this billion-dollar digital powerhouse.

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Suchitra Mandal is a proficient financial writer with expertise in delivering well-researched insights and detailed analyses of companies’ performance and market trends.