Hexaware Technologies stock surges over 27% in 2 days on proposed delisting

Shares of Hexaware Technologies jumped 6.4 per cent on Monday, extending their two-day gains to 27.5 per cent. The sharp gains follow the intent shown by the promoters to take the mid-sized IT services firm private. The indicative price offered by the promoters is Rs 285, 14 per cent below Hexaware’s last close of Rs 332. The reason that the stock has zoomed past its proposed delisting price is optimism behind expectations that the Baring Private Equity-backed firm will revise the price upwards.

“The delisting announcement comes as a surprise and establishes the promoters’ long-term view on the stock. If successful, exit price could be at 35-40 per cent premium to pre-announcement price (based on past cases); if not, stock could pare gains,” says a note by Morgan Stanley.

Analysts’ assumption that the delisting price will be higher hinges on previous delisting bids and Hexaware’s valuations.

“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,” says a note by Emkay.

The last two IT services firms to delist were Polaris Consulting in 2018 and Patni Computers in 2012. Both the firms had to pay more than 30 per cent premium to the delisting floor price they had set. For recent non-IT delistings, the premium between the exit price and the floor price has been in the range of 14 per cent and 242 per cent as well.

 

“We looked at a few cases of successful delistings in the past few years, including IT services stocks such as Polaris and Patni, and noted that on average, a successful delisting has happened at a premium of 35-40 per cent above the pre-announcement price (excluding tail cases). If one were to extrapolate similar trends for Hexaware, the exit price could be in the range of Rs 350-365 per share,” says the note by Morgan Stanley.
 

Going up the brokerage’s calculations, the stock could have another 10 per cent upside from current levels.

Market players said given Hexaware’s relatively-low promoter holding at 62.4 per cent, the delisting bid could be challenging.

For the delisting bid to succeed, the promoter will have to reach the 90 per cent shareholding threshold.

“Hexaware now becomes an interesting play for ‘special situation’ investors. Delisting in India is generally difficult, with investors expecting a significant premium for the same,” says Emkay.

In many past instances, delisting bids have fallen through due to mismatch between investors’ expectations and the offer made by promoters. The Securities and Exchange Board of India  has streamlined the delisting process, which makes it slightly easier for the promoter. However, experts feel, in an event the delisting bid is unsuccessful, the stock could see a major correction.

“In the case of Hexaware, if the delisting attempt is unsuccessful, the share price could potentially revert to pre-announcement levels,” says Morgan Stanley.