Hexaware's potential for growth supported by five key factors, prompting Jefferies to recommend purchase
Hexaware Tech, a leading IT services provider, has been making waves in the industry with its impressive growth and profitability. According to a recent analysis by Jefferies, Hexaware's revenue growth over the past five years has been equally driven by new client additions and the mining of existing client relationships.
Strong Growth Projections
Jefferies estimates that Hexaware's EBIT margins will expand by 70 basis points over 2025-2027 and reach 15.3% by 2027, driven by ERP transformation costs discontinuing from 2026. The investment bank also sees Hexaware growing revenues at 10% annually between 2025-2027. This growth is expected to revert to a 10% Compound Annual Growth Rate (CAGR) over 2025-2027, which would be the third highest in the industry.
North America Dominates Sales
The North America region accounts for 74% of Hexaware's sales, with banking and financial services contributing 37% of its revenues. This geographic concentration and industry focus have been key drivers of Hexaware's success.
Growth Drivers
The big triggers for Hexaware's growth are a platform-led approach, legacy modernization, expansion in geographic reach, focus on the Hi-Tech vertical, and scale-up of the GCC practice. This growth is attributed to a balanced vertical mix, focus on quality client additions, and a strong client mining track record.
Risks and Opportunities
However, the potential restructuring or privatization of Hexaware's two large US clients is a risk that could impact the company's business outlook. Jefferies mentioned these potential changes to highlight upcoming opportunities or risks that investors should be aware of.
Quality and Premium
Despite this risk, Jefferies reiterates that Hexaware's superior quality justifies its 15% premium to Mphasis. Hexaware offers the 5th highest Return on Equity (ROE) and the 4th highest free cash flow conversion in the industry, with lower variability in growth compared to others. This quality is reflected in Jefferies' target price of Rs 930 per share for Hexaware, implying nearly 27% upside for the share price.
Industry Leadership
With its end-to-end IT services across four service lines and six industry verticals, Hexaware Tech is well-positioned to continue its growth trajectory. Jefferies has initiated coverage of Hexaware Tech with a Buy rating, recognising the company's growth characteristics of a mid-sized IT firm.
In conclusion, Hexaware Tech is a company worth watching for investors seeking growth opportunities in the IT services sector. Its strong growth, high-quality services, and strategic focus make it an attractive investment option. However, potential investors should also be aware of the risks associated with the company's reliance on a few large clients. As always, it's essential to do thorough research and consider professional advice before making any investment decisions.
