Stock Analysis. Should you bet on Hexaware delisting?

The stock of Hexaware Technologies has been in focus lately, with its board of directors approving a delisting proposal on June 20.

Hexaware’s promoter — Baring PE Asia-controlled entity HT Global Holdings — currently holds 62.4 per cent stake and needs to acquire a minimum 27.6 per cent stake from the public for the delisting to go through.

The indicative floor price for the delisting offer has been set at ₹264.97, 28.7 per cent lower than the current market price. The indicative delisting price was set at ₹285, 16.4 per cent lower than the current market price.

The floor price and indicative delisting price are very low, but this is in line with past delisting offers wherein the final discovered price (through reverse book-building process) was mostly at a hefty premium to the initial floor price.

For investors holding the stock, the final delisting price could lead to some tidy gains.

For those sitting on the sidelines, betting on delisting gains alone may not be advisable given the sharp rally — the stock has gained 31.4 per cent since the delisting news.

Leaving the delisting process aside for now, investors can turn their focus to the prospects and fundamentals of the company.

Hexaware is well-poised to take advantage of the growing need of digital transformation across industries in the post-Covid scenario and, therefore, holds good promise for investors with a long-term horizon.

Covid impact

The company has weathered the impact of the lockdown well by moving fast on making its employees work from home.

This limited the impact of the lockdown in the March 2020 quarter to only 2-3 per cent of the revenue. Quarter-on-quarter dollar revenues declined 1.7 per cent to $210.6 million.

The company also managed to reduce the concentration of total quarterly revenue from top five and top 10 clients to 34.3 per cent (41.7 per cent a year ago) and 45.1 per cent (51.1 per cent a year ago), respectively.

The company expects the quarter ended June 30, and that ending September to see slow revenue growth. Clients seeking longer payment terms and discounts can impact margins.

However, the firm expects business to pick up within four quarters, ie, the second quarter of calendar year 2021. It has also bagged the highest net new deals of $60 million in the quarter ended March 31, 2020.

The management had said in its earnings conference call, after declaring results for the January-March 2020 quarter, that it would decide on interim dividend at a later date in an effort to conserve cash.

However, on June 23, the board approved an interim dividend of ₹3 per share stating that the cash flow situation continues to be strong.

Lower valuation

Hexaware currently trades at a 12-month trailing PE multiple of about 15 times on an earnings per share (EPS) of ₹22.7.

Hexaware’s peers Mindtree (26.6 times), L&T Infotech (24.3 times) and NIIT Technologies (22 times) trade at higher multiples. NIIT Tech (now Coforge) is also majority-owned by Hexware’s promoter Baring PE Asia.

Hexaware has been trading at a lower valuation due to the overhang of the impending delisting, and concerns on client concentration. But the company has addressed the concentration issue, and also sewed up deals to create a good order book prior to the pandemic-induced lockdown.

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