Hexaware: A second coming

Private equity giant Carlyle-backed Hexaware Technologies Ltd's proposed IPO makes it the second information technology (IT) services company in the last 14 years to go public, and the first after Ashok Soota-founded Happiest Minds Technologies Ltd, which got listed on the bourses in September 2020.

This intent to go public would be the Navi Mumbai-headquartered company’s second listing on the stock exchanges.

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

Aptech Information Systems got listed on the country’s stock exchanges five years later, that is in 1997, before it was rebranded as Hexaware Technologies Ltd in 2002. It traded on the bourses for another 18 years before getting delisted in 2020, the same year as 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.

Also Read: Hexaware Technologies investors to sell shares worth ₹9,950 crore in IPO

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

Subsequently, Baring Private Equity Asia delisted Hexaware's shares and took the company private in 2020.

Enter Carlyle.

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

The company now intends to get relisted 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 the promoter shareholding after the initial public offering (IPO).

Also Read: Hexaware actively seeking mid-sized and large-sized deals

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

But an analyst said that PE firms' intent to sell shares was not just limited to IT services companies.

“Private equity firms are looking to get out of most sectors, not just IT services. This is because they are making use of the excitement in the markets. They want to book their profits, get their cheques and leave," said a Mumbai-based analyst on the condition of anonymity.

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

However, when Carlyle took over, the company's revenue swelled to $971 million as of December 2021. While this was more than twice the revenue the company reported in 2013, it was still below the psychological $1-billion mark, which the company eventually breached in the following year.

Also Read: Carlyle weighs $1 billion IPO for Indian IT firm Hexaware Technologies

At the end of 2023, the company reported $1.25 billion in revenue, up 10% from the preceding year. The company employs around 28,300 employees with a majority of its workforce based in Asia. It gets as much as 72% of its business from America.

Profitability declining

Worryingly for investors, the company’s profitability has been declining since 2017, save 2021 when the operating margins grew 10 basis points. The company reported 12.4% in operating margins last year, a far cry from 16.2% reported seven years ago.

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

Coforge, LTTS, and Persistent Systems reported 16.5%, 17.1%, and 14.4%, respectively, as operating margin, higher than Hexaware's. Each of these companies enjoys a market capitalisation between ₹44,000 crore and ₹80,000 crore.

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

Hexaware operates five service lines, including cloud services, data, and artificial intelligence, its draft 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 cater to clients in the IT services business, through which it gets about 85% of its revenue. The remaining service line is for its business process outsourcing clients, which fetch the company about 13% of its revenue.

At least half of the company’s senior management that would oversee the company’s re-listing on the stock exchanges come from HCL Technologies Ltd, including its chief executive officer Srikrishna Ramakarthikeyan, who served as the president of the Noida-based firm until July 2014.