Hexaware’s IPO: A risky gamble in uncertain times

This raises questions about investor appetite for an IPO as large as Hexaware’s.

The Indian IT services company’s initial public offering involves not a fresh issue of shares but a stake sale by existing shareholders, chiefly its promoter CA Magnum Holdings, a subsidiary of private equity firm Carlyle Group. Hexaware’s IPO aims to raise ₹8,750 crore (or about $1 billion) at a price band of ₹674-708 per share.

Hexaware is returning to the public markets after it delisted in 2020. The following year, CA Magnum Holdings acquired a 95.51% stake in Hexaware for $3 billion from Baring Private Equity Asia, which had held a majority stake in the IT service company since 2013. Now, Carlyle is set to offload nearly 20% of its Hexaware stake in the IPO, which has been slightly downsized from the initially planned ₹9,950 crore offering.

Data suggests that even large IPOs can struggle. A Mint analysis reveals that 70% of the top 10 IPOs by size in India saw subscription levels below 3%. Besides, the timing of Hexaware’s IPO is a key concern, with recent market volatility dampening investor sentiments. Will Hexaware’s share offering, even after being slightly downsized, attract sufficient investor interest?

Hexaware’s impressive show

Despite a recent slowdown in the US and Europe, its key markets, Hexaware has delivered impressive growth, posting a compound annual growth rate of 20% in revenue and 15% in operating profit between FY21 and FY23. 

As the Americas and Europe—which contribute 72% and 22% of Hexaware’s revenue, respectively—show signs of increased discretionary spending, Hexaware is poised for further growth. 

“The demand environment for IT companies has significantly improved over the past 3-6 months,” said Sunny Agrawal, head of fundamental equity research at SBI Securities.

Also read | Hexaware’s IPO comeback: A big payday for Carlyle even with a smaller listing 

“Hexaware, which derives a major portion of its revenue from the Americas and Europe, benefits from the robust economic conditions in these regions. In particular, the outlook for sectors like BFSI (banking, financial services, and insurance) in the US is strong, supported by policies aimed at boosting corporate profits, such as potential corporate tax cuts under the current administration,” Agrawal added. 

“As US IT companies thrive, it’s likely that their IT budgets will remain stable or even grow, ensuring continued revenue opportunities for firms like Hexaware,” he said.

Hexaware’s closest peers include mid-sized IT firms Coforge Ltd, LTIMindtree Ltd, Mphasis Ltd, and Persistent Systems Ltd. 

Slowing customer acquisition

Despite its strengths, Hexaware’s reliance on its top clients remains a concern. While revenue from Hexaware’s top five and 10 clients declined by a little over 100 basis points to 25% and 35.5%, respectively, in FY23, the company’s top 20 customers still account for nearly 50% of its revenue. 

This limited diversification could pose a risk. However, chief executive Srikrishna Ramakarthikeyan said recently that Hexaware’s revenue from its top five customers had diversified, ensuring a more balanced and resilient business model. 

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

However, an equity analyst with a financial services provider, speaking on condition of anonymity, said Hexaware’s top accounts had “underperformed in terms of growth”. 

“Over the last three years (2021-23), the company’s overall US dollar revenues grew at 13.7%, but the top five and top 10 accounts lagged behind,” the analyst said, adding that Hexaware also had a 12% exposure to business process services, a segment that’s vulnerable to disruptions from generative AI.

Additionally, Hexaware struggles to expand footprint in key areas. Its ability to attract new clients in segments like financial services and healthcare is faltering. Revenue contribution from new customers in the financial services segment fell from 3.3% in FY21 to 1% in FY23, while the healthcare and insurance segments saw a decline from nearly 15% to 10% in that period.

Analysts also worry that Hexaware’s history of an open offer and listing may prevent it from offering investors a compelling new story. 

“Hexaware likely believes it can secure better valuations through an IPO, leveraging the current market sentiment. This suggests the company is attempting to cash in at a higher valuation rather than offering something fundamentally new to investors,” said Kranthi Bathini, director of equity strategy at Mumbai-based WealthMills Securities.

At the time of Hexaware’s delisting in 2020, private equity had stepped in, acquiring shares from the market at ₹475 apiece. 

“Their objective was always to eventually return to the market and generate strong returns. With a 95% stake in Hexaware, the private equity fund (Carlyle) is now making significant progress, and an exit over the next few years seems inevitable—just as we have seen in similar cases before,” said the unnamed analyst quoted earlier.

Also read | Retail vs institutional investors: Who best read the consumption tea leaves?

Stuck at the top

Hexaware’s growth in acquiring high-value clients has stalled, raising concerns about the company’s ability for long-term revenue expansion. From FY21 to FY23, Hexaware has had just three clients that generate annual revenues of $50 million or more. Its $75-million client segment has also seen minimal growth, with Hexaware adding just one such client in that period.

Another potential red flag is Hexaware’s headcount trend. After adding over 4,000 employees each in FY21 and FY22, Hexaware saw a net reduction of 369 employees in FY23, raising questions about talent retention and sustained growth. 

However, the company’s chief operating officer Vinod Chandran remains optimistic. “In 2024 alone, we hired over 4,000 employees, achieving a net headcount increase of 4,100 in our tech workforce,” he told Mint.

Another worry for investors is the scarcity of mega deals (worth at least $100 million) for Hexaware, particularly from high-value clients. This, combined with a significant slowdown in industry-wide hiring, underscores the broader challenges Hexaware faces.

“While the company has a strong geographical presence in India and a solid background, the broader IT sector is facing challenges,” said Bathini of WealthMills Securities. 

“Most IT firms rely heavily on revenue from the US, and although the US economy is in better shape than before despite ongoing trade war concerns, IT companies are still navigating uncertainty,” Bathini said. 

Also read | Dr. Agarwal’s IPO: Is a clearer vision on the horizon?

A global tech spending wave?

Despite these challenges, significant opportunities exist for Hexaware. Global enterprise tech spending is projected to reach a staggering ₹343 trillion by 2029, with IT services at the forefront. This presents a massive opportunity for Hexaware to capitalize on the growing demand for digital transformation.

The company is particularly well-positioned to benefit from an explosive growth in data, analytics, and AI services, which are projected to expand from ₹10.1-10.9 trillion in 2023 to ₹25.1-25.9 trillion by 2029.