Hexaware IPO Listing: A Second Coming

The IPO proposal by Hexaware Technologies Ltd, backed by private equity giant Carlyle, makes it the second information technology (IT) services company to go public in the last 14 years, and the first after Ashok Soota-founded Happiest Minds Technologies Ltd, which went public in September 2020.

The move to go public would be the Navi Mumbai-based company’s second listing on the stock exchanges.

Hexaware was founded as Aptech Information Systems Ltd in November 1992 by Atul Nishar. The company first sold 80 shares to seven shareholders, including Nishar, at a nominal value of ₹10 per common share in 1992.

Aptech Information Systems went public in the country five years later in 1997 before changing its name to Hexaware Technologies Ltd in 2002. It was listed for another 18 years before going public in 2020, the same year that the Indian IT industry saw its first listing in a decade, that of Happiest Minds. Before that, Pune-based Persistent Systems went public in 2010.

Hexaware’s ownership changed hands over time. Private equity firm Baring Private Equity Asia (BPEA) bought a 71% stake in the company in 2013 through its investment arm HT Global IT Solutions Holdings.

Baring Private Equity Asia subsequently delisted Hexaware shares and took the company private in 2020.

In 2021, US-based Carlyle Group Inc. acquired 95.51% of HT Global IT Solutions Holdings through its investment holding company CA Magnum Holdings for $3 billion. According to the company’s draft prospectus, Carlyle Group is currently the promoter of the company.

The company now intends to relist on the stock exchanges and the promoters are looking to sell shares worth ₹9,950 crore ($1.18 billion). The company has not disclosed the number of shares its promoter intends to sell nor has it disclosed its shareholding after the initial public offering (IPO).

Carlyle’s plan to sell part of its stake follows that of private equity firm Blackstone Inc, which sold 15 percent of its stake in IT services company Mphasis in June this year.

But one analyst said PE firms’ intention to sell shares was not limited to IT services companies.

“Private equity firms are trying to exit most sectors, not just IT services. This is because they are cashing in on the enthusiasm in the markets. They want to book their profits, collect their cheques and get out,” said a Mumbai-based analyst who requested anonymity.

When Baring bought a majority stake in Hexaware in 2013, it reported revenue of $388 million at the end of December 2013, up 6.4% from the previous year.

However, when Carlyle took over, the company’s revenue rose to $971 million in December 2021. While this was more than double the revenue the company reported in 2013, it was still short of the psychological $1 billion mark, which the company eventually surpassed the following year.

By the end of 2023, the company reported revenues of $1.25 billion, up 10% from the previous year. The company employs around 28,300 workers, most of whom are located in Asia. 72% of its business comes from the United States.

Profitability on the decline

To investors’ concern, the company’s profitability has been declining since 2017, except in 2021, when operating margins grew 10 basis points. The company posted an operating margin of 12.4% last year, a far cry from the 16.2% posted seven years ago.

The company counts among its competitors IT outsourcing firms Coforge Ltd, L&T Technology Services Ltd and Persistent Systems Ltd, which reported revenue of $1.12 billion, $1.16 billion and $1.19 billion respectively in the year ended March 2024.

Coforge, LTTS and Persistent Systems reported operating margins of 16.5%, 17.1% and 14.4%, respectively, higher than Hexaware. Each of these companies enjoys a market capitalization of between ₹44,000 crore rupees and ₹80,000 crore rupees.

Hexaware follows the January-December financial calendar, while IT services companies traditionally follow the April-March accounting year.

Hexaware operates five service lines, including cloud, data and artificial intelligence services, its preliminary red herring prospectus showed. The company has rebranded its service lines and reduced them from six, as stated in its annual report. Four of the service lines serve customers in the IT services business, through which it earns about 85% of its revenue. The remaining service line is for its business process outsourcing customers, which generate about 13% of its revenue for the company.

At least half of the company’s top management that will oversee the company’s new listing on the stock exchanges comes from HCL Technologies Ltd, including its chief executive Srikrishna Ramakarthikeyan, who served as chairman of the Noida-based firm until July 2014.