Goldman Sachs says Hexaware stock influenced more by delisting than its fundamentals

Goldman Sachs equity research arm has said the recent rally in Hexaware Technologies stock price is influenced more by expected outcome of shareholder ballot results than its earnings fundamentals. It has given a sell call on its stock price with a revised twelve month target price of Rs 296, implying more than 20% downside from the current market price.

The stock price of Hexaware Technologies has rallied 48% after the promoters announced their intention to delist the stock from Indian bourses at an indicative offer price of Rs 285.

“Stock we believe in the near term could be influenced more by outcome of shareholder ballot results (due on 10th Aug) around approval of promotor’s de-listing plan, rather than near term earnings fundamentals,” the report said.

“Our 12-month price target of Rs 296 is based on an 85%/15% split of PE and M&A value applied to our next 12 months sales estimates. The target PE is in line with the average 12-year historical PE while the target enterprise value/Sales is based on similar historical M&A transactions,” said the report.

The report added that despite reporting increase in deal wins, muted growth outlook for July-December 2020 came in as a negative surprise and could be an indication of pricing pressure or vendor consolidation ahead. It added that the key risks include higher-than-expected IT demand, INR depreciation vs. USD, stronger market demand for automation and cloud solutions and potential M&A/ de-listing at a higher price.

Stock price of many delisting bound companies had gone up in the past, fuelling concerns of stock price running ahead of fundamentals in some cases, especially after the failure of delisting of speciality chemical company Ineos Styrolution. The stock price of Ineos is currently trading at around Rs 510 as against the discovered price of Rs 1,100 through reverse book building, where its promoter did not even make a counter offer.

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Analysts tracking the company said that Hexaware Technologies has one of the lowest EBITDA margins of around 15.5% as compared to the mid-cap industry average of 18.5-19.0% as it has one of the highest subcontractor expenses amongst mid-cap peers due to higher on-site mix. The company has seen a year-on-year decline in EBITDA margin over the last 3 years.

Promoters of two other companies such as Vedanta and Adani Power have also announced voluntary delisting plans from Indian bourses recently.



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