Happiest Minds IPO Review: Claims to be born digital; Expensive but sector prospects good

Last Updated on October 22, 2020

Recommendation: Keep part of Booster; Exit after earning moderate gain post listing

Positives:

• Good management with 30 years exp. ex-Mindtree, ex-Wipro
• IT sector least affected by COVID slowdown
• Presence in digital bodes well for better than industry growth

Negatives:

• Succession planning
• Limited track record and listing history
• High valuation

Purpose of IPO

Out of a total of 700 Cr, 600 Cr will go to promoters/existing investors, and new proceeds will be used for working capital and general corporate purposes.

About the Happiest Minds

Incorporated in 2011, Happiest Minds Ltd is a Bangalore based IT service provider company. The company has 3 major business units (BU): 1) Product Engineering Services (PES: 51% of revenue) – assists software product companies in building products, platforms, and services 2) Digital Business Solutions (DBS: 27%) – delivers digital app design, development, package implementation, and testing services and 3) Infrastructure Mgmt. & Security Services (IMSS:22%) – delivers infra and security solutions with specialization in the cloud.

The company claims 97% of the company’s revenues come from digital services (one of the highest among Indian IT companies). This could be because it started in 2011 and possibly scaled up only on a new-age technology solution. While being agile and being digital are buzzwords, they remain an IT services company. We recommend evaluating it using the IT services business model as eventually, all IT companies will earn a large portion of sales from Digital.

As of June 30, 2020, Happiest Minds had 148 active customers and has a global presence in countries like US, UK, Australia, Canada, and the Middle East. The business units of the company are assisted by the 3 Centres of Excellence which are Internet of Things, Analytics / Artificial Intelligence, and Digital Process Automation.

Happiest Minds delivers services across industry sectors such as Retail, Edutech, Industrial, BFSI, Hi-Tech, Engineering R&D, Manufacturing, Travel, Media, and Entertainment. Some of its big clients include Microsoft, Amazon Web Services, McAfee, IBM, and PTC.

Employee headcount was 2,439 as of March 31, 2020, which amounts to around Rs. 30 Lakhs per employee ~similar to other IT peers.

Company Promoters

Mr. Ashok Soota is the promoter of the company. He has spent 30 years in the IT services industry and has been associated with Wipro. Along with his Wipro colleagues, he was one of the co-founders of Mindtree. Mr. Ashok Soota later started his own venture Happiest Minds with the help of Private Equity investment and own funds.

Moneyworks4me Opinion

Indian IT sector is mature and the aggregate growth rate will be a summation of developed market GDP growth, market share gains, and rupee depreciation (~8-10% CAGR).

Indian IT has a strong competitive advantage when it comes to scale, cost of operations, and talent availability versus global peers. We find that mid-size IT companies are growing faster than average industry growth.

Happiest Minds is around 700 Cr sales company which is around 1/5^th the size of mid-sized IT firms like Persistent, Cyient, NIIT, Zensar, etc. Other ratios look comparable but the growth profile looks better than peers. We believe presence in more projects oriented digital and small size bode well for medium-term growth.

Happiest Minds has clocked sales of growth of around 20% CAGR in the last 3 years while operating margins improving from loss to 21% in Q1FY21. For now, we can assume last year’s margin of around 14% to be more sustainable versus 21% in the first quarter.

The management claims that 75% of its sales is from sector not affected by the Covid-19 slowdown. It will clock some growth this year but better growth next year.

Based on IPO price, Happiest Minds is asking market capitalization of around Rs. 2,400 Cr which amounts to around 3.3x Price to sales. Average mid-cap IT company is quoting in the range of 1x to 2.5x Price to sales. This puts Happiest Minds in the most expensive range of valuation.

While the management claims presence in the fast-growing digital segment, we find that the IPO price is fully pricing the prospects and leaves little on the table.

Along with usually risks to any IT company like a global slowdown, currency risks, Happiest Minds can face additional risks from i) succession planning; ii) small size disadvantage to control costs and inability to win large-sized deals.

We do expect a very good response to IPO as the IT sector is reasonably protected from Covid-19 and also offers good growth prospects. In lines with the current market trend of “overpaying” for growth, this IPO may turn out a winner. Chances are high that it will get oversubscribed and you may have been content with just 1 lot.

You can risk a small portion of the portfolio for good IPO listing momentum. Have moderate profit expectations and sell in time.

For fundamental oriented long term investor may give it pass as we are already invested in a couple of IT companies at reasonable prices.

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