IPO analysis: Happiest Minds Technologies

IPO rating - Invest with limited exposure

About the issue

Happiest Minds Technologies, a Bengaluru-based company operating in the digital services industry, is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 2 each. The price band has been fixed between Rs 165 and Rs 166.  

The size of IPO is Rs 702.02 crore at an upper price band, including a fresh issue of Rs 110 crore and an offer for sale of Rs 592.02 crore shares by the existing shareholders. Of the total offer for sale, aggregating up to 3.6 crore equity shares, 0.84 crore equity shares are being offered by Ashok Soota (the 'promoter selling shareholder') and 2.7 crore equity shares by CMDB II (the 'investor selling shareholder'). At the upper price band of Rs 166, the company will issue up to 0.66 crore of equity shares, aggregating up to Rs 110 crore.  

The proceeds from the fresh issue of IPO will be used to meet the long-term working capital requirements as well as for general corporate purposes. Besides, the company also wants to benefit from listing gains as it brings in better scrutiny to the company’s operations.

The IPO will open for public subscription on September 7 and closes on September 9.

About the company

Incorporated in 2011, the company has positioned itself as ‘Born Digital. Born Agile’.  The company focusses on delivering a seamless digital experience to its customers. The company helps its customers in finding new ways to interact with their users and clients, thereby, enabling them to become more engaging, responsive, and efficient. It also offers solutions across the spectrum of various digital technologies such as robotic process automation (RPA), software-defined networking/ network function virtualisation (SDN/NFV), big data and advanced analytics, internet of things (IoT), cloud, business process management (BPM) and security. In the fiscal year 2020, almost 97 per cent of the company’s revenues came from digital services. This is one of the highest among Indian IT companies, which differentiates it from other IT companies. Traditional IT companies derive not more than 50 per cent of their revenue from digital services such as cloud, security, and analytics.

Happiest Minds business is divided into 3 business units (BUs):

• Digital Business Services (DBS):

• Product Engineering Services (PES):

• Infrastructure Management & Security Services (IMSS):

Out of the above business units, PES alone accounts for 51 per cent of the revenue while DBS and IMSS account for 27 per cent and 22 per cent of the revenue, respectively.  

The company’s business units are supported by 3 centres of excellence

• Internet of Things (IoT):

• Analytics / Artificial Intelligence (AI):

• Digital Process Automation (DPA):

As of June 30, 2020, Happiest Minds had 148 active customers.

To streamline and accelerate the software development process, the company has created proprietary software development lifecycle processes, applications, and tools. The company devotes significant attention to being able to understand the behaviour, preferences, and trends of its customers through the research and consultation process. This enables the company to have a competitive advantage over its competitors and customers of the company’s client to get a better experience.  

In terms of contribution to the revenue by the customer industry groups, Edutech and Hitech account for the majority of business.

When it comes to the location of the company’s customers, the USA still dominates and forms more than three-fourth of the business. At the end of FY20, it accounted for 77.5  per cent of the revenue, followed by India and the UK.

Financials of the company

In FY20, the company generated total revenue of Rs 6,03.81 crore, which grew at a CAGR of 41.7 per cent between FY18 and FY20. Operating profit or EBITDA in the same period grew at a CAGR of 56.7 per cent and was at Rs 104.744 crore for FY20. Profit after tax has increased at a compound annual growth rate of 60.1 per cent over the same period. It posted a profit of Rs 65.23 crore in FY20. The company reported return on the net worth of 31.79 per cent, 43.32 per cent and 34.08 per cent with a total debt-to-equity ratio of 0.23 for FY20, FY19, and FY18, respectively.

Valuation and recommendation

At the higher price band of Rs 166 and on the expanded equity base considering the IPO, the offer is demanding a market cap to sales (FY20) of 3.5 times, which is in line with the mid-cap IT companies. In terms of PE, the offer is made at around 34 times its FY20 earnings per share on a post-issue equity share capital of around Rs 14.69 crore of the face value of Rs 2 each. This looks on the upper side as other larger listed players, such as Infosys and TCS are available at PE lower than 30 times. Mid-cap listed IT companies are available at around 30 times their FY20 EPS. Therefore the issue is fairly priced.  

Nevertheless, what differentiates the issue is the scalability of the business, higher growth rate, and better return on equity. For FY20, the profit of the company jumped by almost 6 times while the return on net worth turned positive from negative in FY19.

Therefore, readers can subscribe with limited exposure and with longer investment horizon.