Artificial intelligence (AI) at the core: Is this IPO worth your investment?

Between CY21 and CY23, the company has achieved a Compound Annual Growth Rate (CAGR) of 20 per cent in revenue and 15 per cent in net profit.

About the issue  

Hexaware Technologies Ltd is preparing to launch its Initial Public Offering (IPO) for equity shares. See the issue details below.

Objects of the Issue  

Considering that the issue is exclusively an offer for sale, it is crucial to note that the company will not receive any offer proceeds. Instead, all offer proceeds will flow to the selling shareholders, distributed in accordance with the number of offered shares they sell as part of the offer.

Promoter holding 

CA Magnum Holdings is the company's promoter. The promoters currently hold a pre-issue shareholding stake of 95.03 per cent in the company.

Company profile  

The company is a global digital and technology services provider with artificial intelligence (AI) at its core. It harnesses technology to deliver innovative solutions that drive digital transformation and streamline operations for its clients. By embedding AI into every aspect of its offerings, the company has developed a suite of platforms and tools that enable customers to adapt, innovate, and optimize in an AI-first era.

Its business is structured into six operating segments based on the industries it serves: Financial Services, Healthcare & Insurance, Manufacturing & Consumer, Hi-Tech & Professional Services, Banking, and Travel & Transportation. The company's services span five key areas—Design & Build, Secure & Run, Data & AI, Optimize, and Cloud Services—which form the foundation of its offerings.

Service delivery is powered by AI-driven digital platforms, including RapidX™ for digital transformation, Tensai® for AI-powered automation, and Amaze® for cloud adoption. The company serves a diverse clientele across the Americas, Europe, and the Asia-Pacific region, including India and the Middle East.

Financials 

The company has consistently demonstrated notable growth in revenue and profits over the past few years. Between CY21 and CY23, it achieved a Compound Annual Growth Rate (CAGR) of 20 per cent in revenue and 15 per cent in net profit. Annualized figures for CY24 suggest a 14-15 per cent growth in both revenue and profit compared to CY23.

Valuation & Returns

*RoE: Based on FY24 data

The issue is priced with a P/BV ratio of 8.82 times, calculated using its Net Asset Value (NAV) of Rs 80.32 as of September 30, 2024. Considering the company's annualized CY24 earnings and fully diluted equity capital, the price-to-earnings (P/E) ratio is calculated at around 38x.

The company reported a return on equity (RoE) of 18 per cent for the nine months ended September 30, 2024. However, with listed competitors trading at relatively lower valuations while offering higher returns, the company's attractiveness diminishes.

Outlook

With AI poised to transform every aspect of life, the company has already begun capitalizing on emerging opportunities. Backed by a global, scalable, and flexible delivery model, long-standing relationships with a diversified blue-chip customer base, and a strong financial track record, the company is well-positioned for growth.

However, the company derives a significant portion of its revenue from the American market, making it vulnerable to the impact of U.S. and international regulations. Additionally, it operates in a highly competitive environment, with emerging AI developments—such as China's DeepSeek—further intensifying industry dynamics.

Also, factors such as the promoter’s partial exit through an offer for sale, the absence of fresh proceeds for business expansion, and a lacklustre competitive edge in terms of valuation and returns compared to peers temper its appeal. 

Given these considerations, we recommend that investors with a high-risk appetite and surplus funds subscribe to the issue with a long-term perspective but maintain a moderate allocation.