Is Hexaware Tech a bad buy for L&T ?

Hexaware Technologies shares jumped about 4.6 percent to Rs 117.6 on Friday after news emerged that Larsen and Toubro (L&T) is interested in picking up a large stake in the company.

Hexaware’s top management is believed to have met AM Naik, chairman and managing director of L&T, according to media reports. While no details of the meeting were provided, it has triggered speculation about L&T Infotech, the engineering company’s IT arm, being the possible acquirer. However, L&T today has denied reports stating that the company is looking to buyout Hexaware and said that it has not roped in any banks for the acquisition.

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Edelweiss believes if L&T buys Hexaware, there could be some negative implications for L&T. “If the deal takes place, this is negative in the near term given L&T’s sizable commitment to developmental projects which coupled with this deal could put further pressure on the company’s balance sheet”, it said in a report.

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The engineering giant is currently in divestment mode as it plans to sell its stakes in non-core businesses like switchgears, materials handling and other joint ventures. Hence, acquiring another company at this juncture looks unlikely, Edelweiss says.

Shares of Hexaware Technologies have jumped more than 17 percent in the past month, outperforming both the Sensex (-2.7 percent) and the BSE IT Index (3.9 percent).

Promoter Atul Nishar and two private equity share-holders have roped in investment banks Morgan Stanley and Credit Suisse to advise them on selling their majority stake in the company, said media reports. While the promoters have a 26 percent stake, General Atlantic stake is close to 15 percent and Chrys Capital at 9.77 percent.

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A Business Standard report said the promoters estimate Hexaware’s value at $700-800 million (Rs 3,500-4,000 crore) - 15 times calendar year 2011’s operating earnings.