MUMBAI: HDFC Securities has maintained a ‘reduce’ rating on IT firm Hexaware Technologies on account of slow recovery path and valuations adequately factoring in the gradual recovery mode. Earlier, Goldman Sachs had in its report that its stock is influenced more by delisting than its fundamentals.
HDFC Securities has given a price target of Rs 385, almost 10% lower than the current market price of Rs 425. Earlier Goldman Sachs equity research arm has said the recent rally in Hexaware Technologies stock price is influenced more by expected outcome of shareholder ballot results than its earnings fundamentals. It gave a twelve month target price of Rs 296.
The stock price of Hexaware Technologies has surged more than 50% after the promoters announced their intention to delist the stock from Indian bourses at an indicative price of Rs 285.
HDFC Securities report says that the key risks for Hexaware include weakness in travel and transportation, manufacturing and consumer verticals, which accounts for about 24% of its revenue. Further, it will be impacted by lower discretionary spend and supply-side factors that can continue to impact Application Transformation Management service-line and BPS service-line respectively.
The Goldman Sachs report had highlighted that despite reporting increase in deal wins, muted growth outlook for July-December 2020 came in as a negative surprise and could be an indication of pricing pressure or vendor consolidation ahead. It added that the key risks include higher-than-expected IT demand, INR depreciation vs. USD, stronger market demand for automation and cloud solutions and potential M&A or de-listing at a higher price.
Stock price of many delisting bound companies had gone up in the past, fuelling concerns of stock price running ahead of fundamentals in some cases, especially after the failure of delisting of speciality chemical company INEOS Styrolution. The stock price of INEOS is currently trading at around Rs 550, half of the discovered price of Rs 1,100 through reverse book building, where its promoter did not even make a counter offer.
Analysts tracking the company said that Hexaware Technologies has one of the lowest EBITDA margins of around 15.5% as compared to the mid-cap industry average of 18.5-19.0% as it has one of the highest subcontractor expenses amongst mid-cap peers due to higher on-site mix. The company has seen a year-on-year decline in EBITDA margin over the last 3 years. Promoters of two other companies such as Vedanta and Adani Power have also announced voluntary delisting plans from Indian bourses recently.