IGI Logo

Well set-up for the medium term Healthy deal wins and strong CY26 exit bode well for earnings growth

* We met with Hexaware (HEXT) CEO Mr. R. Srikrishna and CFO Mr. Vikash Kumar Jain following the 2QCY26 results to discuss the guidance revision, the demand environment, AI monetization, and the medium-term growth outlook. HEXT has lowered its FY26 revenue guidance, and our discussions suggest the change is largely driven by a delayed ramp-up of deals rather than a deterioration in demand. The focus now shifts to execution over the next two quarters as these projects begin contributing, while investments in large accounts and AI capabilities continue to build the CY27 growth pipeline.

* The company appears well placed to exit the year on a stronger run rate, supported by delayed deal ramp-ups, healthy momentum in modernization programs, and improving AI-led engagements. We reiterate our BUY rating with a TP of INR720 (based on 25x CY27E EPS).

Guidance cut reflects revenue timing, not demand; stronger CY27 setup

* The reduction in CY26 revenue growth guidance to 6-7% YoY (including ~50bp from the CPS rebadging deal) appears to be more of a timing issue than weakening demand. Delayed ramp-up of deals won earlier in the year, coupled with continued weakness in the Travel & Transportation vertical, has pushed revenue recognition to late 3Q and 4QCY26.

* Encouragingly, the pipeline remains healthy, with continued traction in modernization, consolidation, and AI-led transformation programs. We estimate 6.6% USD revenue growth in CY26, with sequential growth improving over the next two quarters as delayed projects begin to ramp up. A stronger exit in CY26, despite the seasonally weaker 4Q, should provide a better starting point for CY27.

Token economics could gradually change AI commercial models

* AI conversations are gradually shifting from productivity gains toward commercial models and token economics. Clients are increasingly evaluating AI deployments by balancing labor costs with token consumption, making AI infrastructure costs an integral part of outsourcing discussions rather than a standalone technology expense.

* HEXT is positioning itself early for this shift through input-, output-, and outcome-based pricing models, supported by proprietary tools that optimize token usage across multiple LLMs (refer to exhibit 1). While token-based monetization is unlikely to become meaningful immediately, it could gradually expand the revenue pool for IT services beyond traditional FTE-based pricing and improve competitiveness in AI-led engagements.

Valuation and View

* Although HEXT has lowered its CY26 revenue guidance, management commentary suggests that growth is largely getting deferred rather than lost. Delayed deal ramp-ups, continued momentum in modernization programs, and healthy growth across banking, healthcare, and manufacturing should support a stronger exit in CY26 and provide a better starting point for CY27.

* We estimate revenue growth of 6.4%/9.7% YoY CC for CY26/27E, supported by improving execution, continued large-account mining and healthy AI-led opportunities. The company also maintained its margin guidance despite continued investments in AI and talent. Reiterate our BUY rating with a TP of INR720 (based on 25x CY27E EPS), implying around 26% upside

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412