Happiest Minds IPO Review – 5 Point Analysis
Happiest Minds Technologies has come up with an IPO, which is open from 7th September’20 to 9th September’20. These days , most of the IPOs have garnered premium in grey market, however that is mainly because of the euphoric sentiment in equity markets. In this blog, let us analyse this IPO on various fronts like company overview, sector analysis, financial and valuation analysis, corporate governance of the company and ultimately whether or not one should subscribe to this IPO.
Happiest Minds IPO Review
- Happiest Minds is a an IT consulting & services company, founded by Ashok Soota in 2011.
- Currently, Ashok Soota holds a stake of 49% (pre-IPO) in the company.
- This IPO will be open from 7th September’20 to 9th September’20. Company plans to raise ~INR 700 crore from the markets.
- Price band is INR 165 – INR 166 per equity share and lot size of this IPO is 90 shares (~INR 14,490).
Application of funds raised through IPO
- Out of INR 702 crore , there is a fresh issue of capital of INR 110 crore and offer for sale is INR 592 crore.
- Fresh issue of capital will be utilized to meet long term working capital requirements and increasing profitability.
- While the major chunk (~INR 592 crore) is the sale of shares owned by promoter, Ashok Soota and private equity investor – JP Morgan Management CMDB II.
- Out of INR 592 crore, ~24% will go to Mr Ashok Soota for sale of his shares and remaining will go to private equity investor.
- Here, promoter wants to sell his shares as ~60% of his shares pre-IPO are pledged and wants to reduce his pledging to 0%
- Mr Ashok Soota has been president of Wipro Infotech from 1984-1999. He was a co-founder of MindTree till 2011 and from April’11 , he is a executive chairman of Happiest Minds Technologies.
- Ashok Soota , aged 77 is a pioneer in the growth of the company. However, the company does not seem to have a succession plan post the retirement of Mr Ashok Soota, which seems concerning.
- Let us take a look at how the share holding of the company is pre and post IPO
- Happiest Minds Technology is mainly a IT service company with its main focus on digital business.
- Digital business mainly includes cloud computing, R&D automation, Internet of Things (IoT), etc
- Smaller company as compared to larger MNCs like Infosys, TCS etc with an employee base of 2845 employees.
Revenue Mix (FY20)
- Platform Engineering contributes majority of the revenue, followed by Digital Transformation and Infrastructure, Management and security.
- If we take a look at geography wise revenue mix, 78% of the revenue is comes from USA. This seems to be a major red flag as its revenues are majorly dependent on political scenario and immigration policies in USA.
- Company’s repeat revenue (revenue from existing clients) is 90% which implies that there is a satisfaction among the current clients, however business from new clients is less.
Employee Mix (%)
- 95% of the employees are based in India (off-shore) and remaining on-site (client -locations)
- This looks margin accretive. However there is a changing trend in IT industry, where companies try to keep a balance between the on-shore and off shore employee mix to avoid the immigration and local issues.
- To avoid immigration and other local problems, company will have to diversify its employee mix in future.
- Company’s revenue per employee is $43,000 , which is quite less as compared to its Indian peers like Mindtree,TCS, etc.
Sector Analysis – IT sector
- IT services industry’s average growth rate is ~6-8%, however digital services has grown by more than 18-20% in the past few years.
- Happiest Minds mainly operates in Digital services business. However, IT majors like TCS, Infosys, etc are also focusing on this segment and trying to increase their revenue from digital services.
- Happiest Minds considers many global organisations like Globant , EPAM as its main competitors in its Red Herring Prospectus and not the Indian MNCs like Infosys, TCS ,etc.
- These companies derive 100% of their revenues from digital services.
- It shows that its peers are trading at premium valuations as compared to its IPO valuation. However, we should note that these companies are quite large in size and hence have higher valuations.
- As seen, company has shown stellar growth in the last 2 years, registering a CAGR of 46%.
- Margins have also significantly improved from 1.6% in FY18 to 15.8% in FY20.
- However, one should note that company incurred losses in FY18, and the growth thereafter although healthy is on a low base.
- Company’s FY20 revenue is INR 698.2 crore, which if compared with revenue of mid size Indian IT company, Mindtree is 1/10th of the overall revenue.
- Mindtree ‘s digital revenues (40-45% of overall revenues) is still more than Happiest Minds Technologies.
- This signifies that it is a small scale company when compared to Indian IT companies. It is on a fast growing segment of digital business, however the growth is mainly on lower base.
- Company’s operating margins are healthy (~21%) and at par with other IT companies like TCS, Infosys, etc.
Valuation Comparison of Happiest Minds Technologies IPO
- Let us compare company’s PE with its other listed Indian peers.
- As we can see, PE at which Happiest Minds Technologies will get listed is at par with its Indian peers like Mindtree and TCS.
- Expected growth of Happiest Minds Technologies is quite higher on the back of lower base, digital focused business model, etc. This might drive the PE higher in future.
- If we annualise this quarter’s earnings and calculate the estimated PE for Happiest Minds, it comes to 17 x for FY21. It is still comparable with its peers.
Should I subscribe to this IPO ?
Given the current euphoric sentiments in the equity markets, company is expected to get listed at premium valuations. This means that investors might get listing gains. In short term, company will grow on the back of presence in high growth digital sector, healthy margins, etc. However, if it is a long term bet or not cannot be concluded as of now. We should look at its performance in the upcoming 2-3 years to conclude if the company is suitable for long term investment.