Hexaware stock gets its day in the sun as the firm’s promoter changes tack2 min read . Updated: 08 Jun 2020, 09:28 PM IST
It may make sense for investors to exit at current prices, rather than wait for the outcome of the delisting process
Shares of Hexaware Technologies Ltd have jumped 27% after the company last week said its promoter plans to acquire minority shares and delist the company.
The company’s majority shareholder, Baring Private Equity Asia, holds a 62.4% stake. To buy minority shareholders at its proposed offer of ₹285 per share, the outgo would be around ₹3,200 crore.
But hardly anyone expects Baring to get away with a delisting at that price. At the current price of ₹331, it looks like it may have to shell out at least ₹3,700 crore to take the company private.
In the past, Baring has tried to sell its stake to other strategic investors, but has come back empty-handed. This acted as an overhang on the stock. Ahead of the delisting announcement, the stock traded at a discount to most of its mid-cap IT peers.
Taking the company private can help promoters attract strategic buyers who are looking to expand offshore presence, point out analysts at Kotak Institutional Equities. It may also help promoters attain better valuations, given that the buyer is saved the hassle of an open offer for minority shareholders.
Knowing this, minority shareholders are trying to extract their pound of flesh. The stock was trading at 13.8 times estimated FY21 earnings estimates ahead of the delisting offer last week, notably cheaper than its peers.
After the sharp jump in the stock, it now trades at 17.6 times forward earnings, which already brings it on a par with some of its peers.
“We see a strong likelihood of a hike in the offer price on account of much higher valuation multiples accorded to recent buyouts by strategic and financial investors, relative valuation discount for Hexaware at the offer price compared to peers and past precedents wherein offer prices have seen significant upward revisions," Emkay Global Financial Services Ltd said in a note.
Buyouts in the IT services sector in the past happened around 12-15 times trailing 12 months Ebitda, points out analysts at Kotak Institutional Equities.
Assuming a 12 times multiple to Hexaware’s trailing 12 months Ebitda would imply a delisting price of ₹360, calculation by analysts at Kotak show. Ebitda is earnings before interest, tax, depreciation and amortization.
But also note that onerous regulations make delisting a time-consuming process in India.
If minority shareholders act too pricey in the reverse book-building process, the company’s promoter may well back off from its plans to delist. Then there is the taxation angle to consider; selling shares in the open market is more tax-efficient.
Against this backdrop, it may just make sense for investors to exit at current prices, rather than wait for the outcome of the delisting process.