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ICICI Securities Report
Hexaware has reported consistent healthy revenue growth with 12.4% CAGR over CY18 to CY25. Its revenue growth has been ahead of larger-sized peers LTIMindreee and Mphasis and lower than high growing peers Coforge and Persistent over CY21-24. CY25 was an exception to this trend, but ICICI Securities believes that this trend could continue and model USD revenue 10.7% CAGR over CY25-27E.
The brokerage models Ebit margin to be between 13-14% over CY26-27, in line with the company's guidance, Margin improvement would be driven by support from revenue growth leverage, scope to reduce subcontracting costs, improve utilisation and investments for senior leadership in the base with partial offset from investments in large deal ramp-ups and AI capability building. ICICI Securities models 13.8% EPS CAGR over CY25-27.
Hexaware has limited trading history and is currently trading at attractive valuation of 16x CY27E EPS. The brokerage assigns target P/E multiple of 20x, in line with the current one-year forward earnings multiple of Mphasis and 7% / 13%/ 38% discount to LTIMindtree / Coforge / Persistent.
The brokerage values Hexaware at 20x on CY27E EPS of Rs 29 to arrive at target price of Rs 570 and assign Buy rating.
Sector valuation multiples have de-rated significantly over the past month, driven by investor concerns regarding the long-term growth outlook in light of recent advancements in agentic AI. While ICICI Securities maintains that IT services face no existential threat, valuation multiples are likely to remain suppressed in the near term. Consequently, stock price returns will likely be driven by earnings CAGR, unless there is credible evidence that net-new AI use cases are meaningfully accelerating the sector's growth trajectory.
In this environment, the brokerage expects mid-tier peers to continue trading at a valuation premium relative to large-caps.
Their superior revenue growth outlook is supported by:
- Minimal drag from legacy systems and a lower base effect.,
- Greater agility and client-centricity.
- The equalizing power of Gen AI, which allows nimbler players to compete effectively against larger incumbents.
Risks
Key downside risks:
- Change in top leadership could temporarily slowdown execution,
- Lower margin profile vs mid-tier IT services peers leave lower room for investments in competitive demand environment,
- Unfavourable vendor consolidation outcome or insourcing by top clients could adversely impact revenue for Hexaware,
- Gen AI led deflationary impact.
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