Hexaware: Open offer a good opportunity to exit

Ending about one and a half year of speculation on stake sale by promoters and General Atlantic, Hexaware announced sale of the 41.8 per cent to Baring Private Equity Asia (Barings) late Friday. Not surprisingly, Hexaware stock has outperformed the Sensex in this period and was up about 6 per cent on Monday as well.

Hexaware has been able to bag more number of larger, long term deals thus providing improved revenue visibility in the past two years. However, this deal flow is largely driven by higher mining of its existing customers. Hence, the sustainability of these clients post the ownership change will be a key fuel for future growth of the company. Given that the current management team will continue unchanged, the deal is unlikely to have an impact on Hexaware's operations atleast in the medium term.

The last big acquisition in this sector was the takeover of Patni promoters’ stake of 83 per cent by iGate for $1.22 billion. This deal priced Patni at a Price to earnings ratio of 10.8 times. Hexaware deal too is valued at 11 times CY13 and 9 times CY14 estimated earnings - in-line with the Patni deal. Notably, Hexaware has traded at a one-year forward price/earnings band of 5-13 times historically. The deal value is higher than its average price/earnings multiple of 9 times, implying limited upsides from here on. The open offer (to garner additional 26 per cent stake) price of Rs 135 per share implies 12 per cent premium over Friday's closing price of Rs 120.

“Hexaware has seen mixed revenue performance in the past 2-3 quarters. While September quarter guidance is better, we would look for changes in growth trajectory with new ownership in place. We believe the stock is fully valued and advise investors to tender shares in the open offer”, says Rumit Dugar, IT analyst at Religare Capital Markets.

Out of the 13 brokerages polled by Bloomberg since August 23rd 2013, 7 are buyers while 5 have a Neutral view on the Hexaware scrip. Their average target price of Rs 131 per share though implies limited upsides from current levels. Investors should thus subscribe to the open offer.