Will retail investors profit from Hexaware’s turnaround success story?

medium118676594After a long stretch away from the public eye, mid-tier IT services company Hexaware Technologies returned to the public markets last month.The largest Indian IT IPO (initial public offering) since Tata Consultancy Services (TCS) saw strong interest, its shares were oversubscribed, it listed at a premium to its offer price and, despite market volatility, its shares rose on its first day back on the stock exchanges.There were, of course, good reasons for this. After Hexaware was sold by its promoters in 2014, it spent a decade turning its business around. Private equity (PE) players brought in former HCL Tech executive R Srikrishna, who is popularly known as Keech, as chief executive officer (CEO).Under Srikrishna, the company brought in other tier-1 senior leadership, focused on growth and client mining. In just about a decade, Hexaware’s revenue has tripled, and more importantly, it appears to have cracked client mining.But as the lock-in period for its shares comes to an end in a month, a niggling question remains. Hexaware’s PE owners have reaped the value of the turnaround, so what will the company need to do next to make sure its public shareholders also benefit? medium118676526All about timingWhen Hexaware was first sold to Barings Private Equity Asia (BPEA), the company commanded a valuation of ₹3,600 crore. BPEA took the company private in 2020 at the peak of the Covid disruption. In 2022, it sold the company to PE firm Carlyle at a reported valuation of $3bn. The company’s valuation now stands at about ₹49,000 crore.Hexaware’s return to the market comes at an interesting time — after years of slowdown, Indian IT companies are more positive about growth from their core US market, even though other regions such as the UK still show slow spending. More crucially, the impact of GenAI is just beginning to be felt. While the technology is resulting in new deals, clients want the benefits of productivity upfront — hurting IT company revenue.But expectations have already reached significant highs. HSBC Research states that “relative and absolute valuations are not undemanding compared to the broader market”. In less ‘analyst’ terms — IT companies will need to do much better to outperform other sectors, something HSBC is sceptical about.“We think it will be tough for (the) IT sector to outperform the market in 2025/FY26,” said Yogesh Aggarwal, head of research at HSBC, in a note dated February 28.Aggarwal said that the brokerage prefers turnarounds and mid-tier companies in the sector. But Hexaware already has a high market capitalisation, relative to peers, according to data provider Trendlyne. Thus, it will need to do far more to generate market-beating returns for its investors.“They have done a good job growing and mining clients. But the kind of growth they will need to show will require some amount of capability acquisitions, which they have been open to doing,” says a former Indian IT executive who advises PE firms on their IT investment strategy.In May 2024, Hexaware bought data consulting firm Softcrylic to boost its data practice. The company is also currently in the fray to acquire SLK Software, having shown initial interest by placing a non-binding bid for the Bengaluru-based technology firm that offers AI, intelligent automation and analytics services to customers, ET reported last week.Mid-tier IT companies are increasingly looking at acquisitions. Coforge is moving to acquire 100% of Cigniti Technologies, an acquisition that will help it grow to a $2bn company. Zensar CEO Manish Tandon told ET Prime that the company is also looking at acquisitions to grow. medium nocaptionhttp://youtu.be/nrDESb5VU1w?si=G9MBZr1GfDfsVQKBSales and margin boostMid-tier IT companies typically have a harder time mining customers as a large amount of their work used to be project-based. Over the past few years, mid-tier IT companies have followed a similar turnaround playbook — they have hired CEOs and senior executives from tier-1 companies and moved towards the same strategies used by their larger peers — including dedicated processes to mine clients.Hexaware has shown great success here — it has gone from one $100mn customer in 2021 to two in 2024, according to industry sources. Growing multiple customers to the $100mn mark is the IT holy grail — it shows the company has the ability to foster large relationships with multiple customers — reducing client concentration.This is what Hexaware will need to focus on to boost returns for its newest investors. It will also need to find new customers and grow those relationships.“They have a strong hunting and mining team. And they have also been looking to boost their sales team in North America for new logos,” says an IT consultant who has monitored the company.This is particularly crucial as the industry expects the demand environment to turn — becoming more favourable even as risks to that thesis exist.The Americas market is crucial for Hexaware — it gets more than 70% of its revenue from the Americas. While US President Donald Trump’s tax cuts are expected to provide a stimulus to IT spending in the country, his continuing call for tariffs and unemployment caused by shrinking the federal workforce could dampen economic sentiment, hurting growth.Another way Hexaware can generate returns for the new shareholders is by increasing its margins, thereby boosting earnings per share. The company books more than 55% of its revenue onshore, higher than its peers. Moving more work offshore is an easy lever that the company could use to improve its margins.But mid-tier companies typically have to do larger amounts of work onshore — as part of the project-led nature of their job. Hexaware’s rival Coforge booked 51.7% of its revenue offshore in FY24, following years of focusing on the metric to boost margins. In the same year, Infosys booked more than 75% of its revenue offshore.Hexaware CEO Srikrishna has made a killing for his PE investors. He will have a harder task to get his public investors the same returns.