DAM Capital initiates coverage on Hexaware Technologies; check rating & target price

DAM Capital has initiated coverage on Hexaware Technologies setting a target price of Rs 820 and projecting a 17% upside. Hexaware is a Tier II IT services player, recognised for its diversified portfolio across sectors such as BFS, Healthcare & Insurance, Professional Services, and Manufacturing & Consumer. This diversification reduces Hexaware's vulnerability to sector-specific risks, distinguishing it from many Tier II peers. Despite multiple ownership changes, the company has maintained management stability and strong execution capabilities, which are pivotal in its growth strategy.

Analysts at DAM Capital expect Hexaware to achieve an 11% revenue compound annual growth rate (CAGR) over the period of CY24–26E. This growth is anticipated to trail only Persistent Systems (PSYS) and Coforge among its peers. Positioned in the USD 1–2 billion revenue bracket, Hexaware is well-placed to secure mid- and large-sized contracts. The company's growth potential is further bolstered by aggressive vendor consolidation efforts by a large global systems engineering (GSE) client, offering additional upside to its growth trajectory.

Hexaware Technologies, which launched its Rs 8,750 crore IPO in February 2024, is currently trading slightly below its issue price of Rs 708. The stock settled at Rs 700 on Monday, falling merely 0.11 per cent for the day. It is currently 18 per cent below its all-time high of Rs 850 apiece.

Financially, Hexaware is highlighted for its strong free cash flow generation, despite a negative FCF/PAT conversion ratio of -120%. The company's EBIT margins are expected to expand over the CY24–26E period, aided by the easing of one-off expenses and improved SG&A leverage. This outlook supports a robust 17% earnings per share (EPS) CAGR, reflecting DAM Capital's confidence in Hexaware's financial health and performance.

The brokerage maintains that Hexaware's diversified service lines not only shield it from industry-specific headwinds but also position it uniquely for sustained success. This model allows Hexaware to capitalise on opportunities across various sectors, unlike many of its Tier II peers who focus on niche markets. DAM Capital's valuation of Hexaware at 30x FY27E EPS suggests an attractive investment opportunity, given the company’s consistent double-digit growth expectations into CY25.

In conclusion, DAM Capital's positive outlook for Hexaware Technologies is grounded in its strong market positioning, robust financial metrics, and strategic management practices. The set target price of INR 820 reflects the brokerage’s high confidence in Hexaware's continued growth and profitability, making it a compelling option for investors seeking exposure to the IT services sector.