Five things to know about the Hexaware IPO

Hexaware

IT firm Hexaware Technologies will re-list soon on the bourses at a time when the sector itself is wading through one of its most turbulent times in recent memory. The Rs 9,950-crore issue would be India’s largest initial public offering (IPO) for an IT company in two decades after behemoth Tata Consultancy Services went public in the early 2000s with its Rs 4,713-crore issue.

The US private equity giant Carlyle-controlled Hexaware Technologies has filed draft papers with the Securities and Exchange Board of India as a pure offer for sale (OFS), according to a copy of the draft red herring prospectus (DRHP) reviewed by Moneycontrol. On May 14, Moneycontrol was the first to report that Carlyle-backed Hexaware had picked five investment banks—Kotak Mahindra Capital, Citi, JPMorgan, HSBC Securities and IIFL Capital—as advisors for the deal.

Here are the top five things to know about the Hexaware IPO from its DRHP.

Why did Hexaware delist?

In 2021, Carlyle acquired Hexaware from Baring Private Equity Asia (now EQT) for around $3 billion, in India's biggest-ever private-equity deal.

Baring offered Rs 264.97 per share as a part of the delisting offer, a discount of more than 35 percent from the Rs 412 a share it was trading at then. However, the mid-size IT services firm’s acquirer and promoter settled at the discovered price of Rs 475 per equity share as the final/exit price for delisting offer.

Back then, Hexaware Technologies was the first company to successfully delist from Indian bourses in three years.

Carlyle stated that the reason for the delisting was to take full control over the company and necessitate various cost control measures. Promoters held over 62 percent stake in the company and the rest was held by the public.

At the time, experts had said that the delisting could help the company take aggressive decisions, implementing certain cost-saving measures in its operations, and would make the process of change of ownership much smoother.

Operational parameters

Hexaware’s performance has been a mixed-bag so far when compared to other mid-sized IT service providers such as Coforge, LTIMindtree, Mphasis and Persistent Systems, which have similar revenue and scales of offering.

The company’s revenue from operations grew by over 12 percent year-on-year to Rs 10,380 crore in FY24, while profit grew over almost 13 percent to Rs 997 crore. Hexaware follows January-December as its financial year.

Only Persistent Systems performed better than Hexaware when compared with top five of its peers with similar size and scale, while Mphasis posted a negative figure in the same period.

On employee metrics, Hexaware is relatively better positioned. Its headcount has been rising over the last couple of quarters and also on a full-year basis. This is a healthy sign when compared to its peers whose employee counts have decelerated.

Hexaware added over 3,500 employees in the first six months of 2024, taking the workforce to 31,870. Although the absolute headcount increased for mid-tier IT companies, the annual growth in headcount has slowed against the backdrop of tepid demand and rising utilisation levels. The metric grew over 7.5 percent in FY24, lower than the almost 12 percent growth seen in FY23. On the other hand, Hexaware’s employee count went up over 13 percent year-on-year in the first six months of 2024.

The company’s utilisation and attrition rate, however, are at levels similar to that of most of its peers.

Also read: Hexaware plans to hire 8,000 professionals across roles

AI trend may reduce demand

The company has written extensively about generative AI in its DRHP. Hexaware said the trend of AI advancement may reduce the demand for outsourcing as a business. This is because companies are increasingly opting for AI-driven solutions that offer cost-efficiency and rapid scalability without geographical constraints.

“Tasks that were once outsourced, such as routine data processing, basic customer service interactions, and repetitive software development tasks, can now be efficiently handled by AI algorithms,” the company said in the document. “This shift can be seen impacting the entire outsourcing supplier ecosystem.”

Hexaware said the years 2026 and beyond will see greater adoption of GenAI, being implemented across various departments and functions within organisations.

Nonetheless, this shift also presents opportunities for IT outsourcing firms to adapt and specialise in areas where human expertise remains crucial, the company said. “Overall, the impact of gen AI on IT services and BPS markets is a blend of challenges and opportunities,” the company said in the document.

Also read: Indian IT cos struggle with Gen AI rollout delays amid rising compute, cloud cost

Investor appeal

Hexaware's IPO comes at a time when sector leaders are cautiously optimistic on growth returning. The company said it has an established presence in the fields of digital transformation services, especially in areas such as AI and cloud technology, and is well-positioned to capitalise on this.

Hexaware’s DRHP also shows that subcontracting charges have significantly increased in recent years due to additional subcontractors and third-party service providers. “We focus on improving our subcontractor-to-employee mix, reducing our subcontracting charges as a percentage of revenue from operations,” it said.

The company is taking the OFS route, which means it will not receive any proceeds from the issue as it is the promoters who will sell their holdings.

Legal challenges

Hexaware Technologies disclosed multiple legal challenges in its DRHP.

In May 2024, a former employee of its subsidiary, Araroop Chakraborty, filed a complaint in the US alleging breach of contract, discrimination and wrongful termination, seeking $1.5 million in damages. This matter remains unresolved and poses potential financial risks for Hexaware.

In Germany, subsidiary Hexaware Technologies GmbH is involved in several disputes with a former employee, Prasad Rao Gollapudi, over his dismissal and claims totalling over 300,000 euros. The company is pursuing legal action against Gollapudi to terminate his employment under German laws.

Additionally, Sukanya Kripalu, a non-executive independent director of Hexaware, is involved in a contempt petition related to a copyright dispute in India. The Madras High Court ordered her company, Entertainment Network (India) Ltd, to deposit Rs 20 crore in a pending royalties case. Although the order has been stayed, this ongoing litigation might entail reputational risks for the company.