Recent deal benchmarks likely to drive offer price higher
* Hexaware’s promoter, Barings PE, has expressed the intent to delist the company at an indicative offer price of Rs285, according to a regulatory filing. The company’s board will consider the offer in a meeting on June 12, 2020.
* We see a strong likelihood of a hike in the offer price on account of (1) much higher valuation multiples accorded to recent buyouts by strategic and financial investors, (2) relative valuation discount for Hexaware at the offer price compared to peers and (3) past precedents wherein offer prices have seen significant upward revisions.
* Hexaware now becomes an interesting play for ‘special situation’ investors. Delisting in India is generally difficult, with investors expecting a significant premium for the same and the current offer price leave enough scope on that front as we explain below in detail.
* Given the trigger from the delisting possibility and despite expecting a strong likelihood of an upward revision in the offer price, we suspend our ratings/TP on the stock. Our last published ratings for Hexaware was Hold, with a TP of Rs270
* Strong likelihood of upward revision in offer price on recent deal benchmarks and relative valuation to peers
We see a strong likelihood of an upward revision in the offer price for Hexaware on account of (1) recent deal benchmarks for strategic buyers and financial investors (refer to Exhibit 1), (2) valuations discount to Tier II peers even after a 20% run-up in the stock on Friday and (3) past precedents where we have seen significant upward revisions in the offer price after the initial offer(iflex/Oracle, Patni/iGate, Polaris/Virtusa). Thereby, Hexaware now becomes an interesting play for investors who focus on special situations.
* Suspend ratings/TP in the wake of the delisting event
While we continue to see a strong likelihood of a revision if the offer price for Hexaware, driven by (1) rich and premium valuation multiples accorded to some of the Tier II peers currently and (2) higher valuation multiple benchmarks for recent buyouts by strategic and financial investors in the Tier II IT Services space, we suspend our ratings and TP for Hexaware driven by this event. Our last published ratings for Hexaware was Hold, with a TP of Rs270.
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