AI-Led Cloud Modernization And GCC Expansion Are Expected To Drive Long-Term Upside

Catalysts

About Hexaware Technologies

Hexaware Technologies is a global IT and business process services provider focused on cloud transformation, AI led modernization and digital operations across key verticals including financial services, banking and travel and transportation.

What are the underlying business or industry changes driving this perspective?

• Scaling AI based software engineering and assurance offerings, along with platforms such as RapidX and Amaze, positions Hexaware to capture rising enterprise spend on modernization, supporting faster revenue growth and higher project level margins as automation improves delivery efficiency.
• Growing demand from clients to unlock full value from prior cloud migrations, including performance and cost optimization, is driving deeper Amaze led transformation programs that can lift large account revenues and support stable to improving EBITDA margins over the medium term.
• Expansion in global capability center build outs through the SMC acquisition and related GCC transformation work creates a structural pipeline of multi year engagements, adding visibility to revenue growth and supporting EPS as the acquired business is already accretive.
• Strength in financial services and recovering banking demand, supported by vendor consolidation trends and share gains in large GSE and global bank accounts, is expected to underpin above company average revenue growth and operating leverage driven improvement in earnings.
• Improving delivery mix through higher offshore utilization and disciplined workforce restructuring, combined with tapering ERP program costs, is expected to support EBITDA within the guided band and drive incremental expansion in net margins as volume growth resumes.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Hexaware Technologies's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 11.1% in 3 years time.
• Analysts expect earnings to reach ₹20.0 billion (and earnings per share of ₹31.6) by about December 2028, up from ₹14.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 38.2x on those 2028 earnings, up from 33.3x today. This future PE is greater than the current PE for the IN IT industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Management continues to target a material step up in scale from roughly $1 billion revenue today to $3 billion by calendar 2029. If macro uncertainty around tariffs and geopolitics eases, the currently delayed consolidation deals and strong AI and cloud modernization pipeline could convert quickly into double digit top line growth, which would likely drive the share price higher in line with accelerating revenue and earnings.
• The acquisition of SMC and the focus on global capability centers positions Hexaware to benefit from a structural increase in GCC build outs from about 1,700 to 2,700 over the next 4 to 5 years. As this higher margin, EPS accretive business scales, it could support faster than expected growth in revenue and net income, challenging the assumption of a flat share price.
• Secular demand for AI based software engineering, legacy modernization via RapidX and Amaze, and cloud optimization remains strong across financial services, banking and healthcare. As delayed client decisions normalize, these offerings can expand project sizes and wallet share, leading to sustained expansion in revenue and operating margins.
• Operational metrics are trending positively with rising utilization, improving offshore mix, low attrition and tapering ERP implementation spend. Recent restructuring is expected to have a payback of less than one year, all of which could structurally lift EBITDA margins above the current 17.2% and result in faster EPS growth than currently discounted in the share price.
• Financial services and banking, two of Hexaware's core verticals, are already showing strong year on year growth and recovering sequential momentum despite macro softness. If mega consolidation deals in government sponsored enterprises and global banks close and ramp as indicated, this could underpin sustained double digit growth in revenue and earnings, creating upside risk to a flat share price view.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹801.67 for Hexaware Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹950.0, and the most bearish reporting a price target of just ₹700.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹180.0 billion, earnings will come to ₹20.0 billion, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹761.45, the analyst price target of ₹801.67 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.