Home >Markets >Mark To Market >Hexaware  gives investors another reason to demand pound of flesh

Shares of Hexaware Technologies Ltd have risen 43% since majority shareholder Baring Private Equity Asia said it plans to acquire minority shares and delist the firm. Investors tend to demand their pound of flesh in such instances, and Hexaware will be no exception.

The firm’s June-quarter results give minority investors another strong reason to stick their ground. Hexaware’s revenue fell just 0.9%, sequentially, despite a 10% exposure to the troubled travel and transportation vertical. What makes this remarkable is that most other mid-sized IT firms posted revenue dips of 5-7%.

What’s more, Hexaware made some drastic cost cuts, which resulted in a 14% sequential jump in operating profit. “The strong margin beat was led by headcount reduction (6% quarter-on-quarter)," Motilal Oswal Financial Services Ltd analysts said in a note. Of course, it remains to be seen how much of this is sustainable. However, a strong showing does raise the hopes of investors. And, the fact that this comes in the middle of the delisting process may just increase the resolve of minority shareholders to demand a relatively higher exit price.

Buying cheap
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Buying cheap

Baring had initially indicated an offer price of 285 per share. But as analysts at Emkay Global Financial Services pointed out in a note back then, it results in fairly low valuation multiples, especially when compared to previous large transactions. The previous two transactions last year, involving NIIT Technologies Ltd and Mindtree Ltd, were at roughly 2.1 times trailing 12-month revenues. In stark contrast, Baring’s indicative offer valued Hexaware at only 1.5 times trailing revenue and at about 12 times trailing profit.

Assuming a valuation multiple close to past deals, the acquisition price would be above 400 per share. Hexaware shares currently trade at 372 apiece. Its valuations have risen to about 16 times trailing earnings, compared to less than 12 times before the delisting announcement. While further upside may be limited, it does look like an eventual delisting, if it happens, will be at a price closer to the current market price, rather than Baring’s indicative offer price.

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