Hexaware’s IPO Comeback: Will Carlyle-Backed IT Giant Follow Happiest Minds’ Success?

Private equity giant Carlyle is preparing to take Hexaware Technologies Ltd public again. This will make it the second IT services company to go public in the last 14 years, following Happiest Minds Technologies Ltd, which listed in 2020. Hexaware’s upcoming IPO marks its return to the stock market, having been delisted in 2020.

A Look Back at Hexaware’s Journey

Hexaware, originally known as Aptech Information Systems Ltd, was founded by Atul Nishar in November 1992. The company initially sold 80 shares at ₹10 each to seven shareholders, including Nishar. Aptech listed on the stock exchanges in 1997 and rebranded as Hexaware Technologies Ltd in 2002. It continued to trade publicly for 18 years before being taken private in 2020.

Private equity firm Baring Private Equity Asia (BPEA) acquired a 71% stake in Hexaware in 2013 through its investment arm, HT Global IT Solutions Holdings. In 2020, BPEA delisted Hexaware, only for US-based Carlyle Group Inc. to buy 95.51% of the company a year later for $3 billion. Carlyle is now the main promoter, as per the company’s draft red herring prospectus.

IPO Plans and Share Sale

Hexaware is now set to be relisted, with Carlyle aiming to sell shares worth ₹9,950 crore ($1.18 billion). However, the company has not revealed how many shares Carlyle will sell or how much stake it will retain after the IPO.

Carlyle’s move follows a similar strategy by Blackstone Inc., another private equity firm, which sold 15% of its stake in IT services company Mphasis earlier this year. According to a Mumbai-based analyst, private equity firms are keen to exit not only IT services but other sectors as well, seeking to capitalise on the current market excitement.

Financial Growth and Declining Profitability

Hexaware’s financials have seen significant growth since Baring’s acquisition. In 2013, the company reported revenue of $388 million. By the time Carlyle took over in 2021, that number had risen to $971 million. In 2023, Hexaware crossed the $1 billion mark, reporting $1.25 billion in revenue, up 10% from the previous year.

However, Hexaware’s profitability has been declining since 2017, except in 2021 when operating margins improved slightly. In 2022, Hexaware’s operating margins were 12.4%, a drop from 16.2% in 2017. Comparatively, its competitors, like Coforge Ltd, L&T Technology Services Ltd, and Persistent Systems Ltd, have higher operating margins and larger market capitalisations.

Company Overview

Hexaware operates five key service lines, mainly focused on IT services, including cloud services, data, and artificial intelligence. Four of these lines serve the IT services sector, which accounts for about 85% of its revenue. The remaining 13% comes from its business process outsourcing (BPO) clients.

A significant portion of Hexaware’s senior management, including CEO Srikrishna Ramakarthikeyan, previously worked at HCL Technologies Ltd. Ramakarthikeyan, for instance, served as president of HCL until July 2014. This experienced team will oversee the company’s re-entry into the stock market.

In summary, while Hexaware has seen solid revenue growth, its declining profitability is a concern for investors. Its upcoming IPO will offer a second opportunity for the company to grow and compete in the IT services market.