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    Will Happiest Minds IPO make investors happy? Here's what you must know

    Synopsis

    Analysts said the valuations look high when compared with traditional IT players, but attractive when compared with digital players overseas.

    IPO
    PES alone accounts for 51 per cent of the company's revenue.
    NEW DELHI: The Rs 702 crore IPO of Happiest Minds kicked off on Monday. With services such as cloud and security and analytics accounting for 97 per cent of its revenues, the Bengaluru-headquartered firm is being touted more as a digital services firm than another from among the legacy IT players, which have only 35-50 per cent of revenues coming in from the segment.

    Price in the Rs 165-166 band, the issue is seeking a valuation of 26.76 times FY20 earnings per share. The digital firm has raised Rs 316 crore from 25 anchor investors, including the Government of Singapore, Goldman Sachs, Kuwait Investment Authority, Nomura Funds Ireland, Jupiter India and Pacific Horizon Investment.

    Analysts said the IPO valuation looks high compared with traditional players, but is still attractive compared with overseas digital players. They said midcap and smallcap IT stocks are in demand these days and investors with a little risk-appetite can consider subscribing to the IPO.

    Here's what analysts said:

    Motilal Oswal Securities: Subscribe
    The brokerage said that the company's valuations are comparable to larger mid-sized IT companies. It likes the company given its strong presence in digital services, business model with end-to-end capabilities and fast improving financial performance.

    "Hence, investors can Subscribe to the IPO. Further considering market conditions and bright prospects for IT companies post Covid-era, one may also get listing gains," the brokerage said.

    Angel Broking: Subscribe
    The brokerage said that given the high exposure to digital services and strong promoter background, the company will continue to grow at a faster pace as compared to similar sized companies and therefore should command a premium valuation to the peer group.

    "The company had 148 active customers as of Q1FY2021 with the share of repeat business growing consistently over the year to account for a significant portion of revenues indicating a high degree of customer stickiness," it said.

    Choice Broking: Subscribe
    At the upper end of the price band, the issue seems to be fully priced compared with its domestic peers, the brokerage said. But it noted that the company cannot be fully comparable with the domestic IT peers. "There are international peers, who derive almost all of their revenue from digital services, trading at a P/E multiple ranging from 67-139 times. Assuming the valuations of these companies in the US markets to be frothy, the valuation demanded by Happiest Minds seems to be attractive," it said.

    Prabhudas Lilladher: Subscribe
    This brokerage says implied P/E multiple for Happiest Minds is 12 times on annualising Q1FY21 EPS. The brokerage has a subscribe rating on the issue as it expects margins expansion, client mining and large deal wins ahead. "Comparatively mid-cap IT services companies listed in the US such as EPAM, Globant and Endava derive 80-90 per cent of their revenues from new technologies, while Indian IT generates ~35-50 per cent and Accenture generates 65-70 per cent. The global digital services market of $691 billion in 2019 to grow at a CAGR of 20.2 per cent to $2 trillion. The legacy IT market as a percentage of total technology spend is also estimated to decline from 85.7 per cent share in 2019 to 65 per cent share by 2025, with digital spend making commanding 35 per cent share by then," the brokerage noted.

    Geojit Financial Services: Subscribe
    The brokerage is positive on the strong management, given promoter Ashok Soota was co-founder of Mindtree. Besides, the brokerage likes potential for growth in the digital space post the ongoing pandemic and sees valuation as attractive. It has recommended a subscribe rating on the IPO for long term perspective.

    Hem Securities: Subscribe

    Astha Jain of Hem Securities said the company is bringing the issue at post-issue PE of 12 times on an annualised Q1FY21 EPS basis. “The company has shown strong growth in its financials in last couple of years. It is strong brand in digital IT services with growing high revenue-generating customer accounts, with a high proportion of repeat revenues and revenues from mature markets .We like the scalable business model of company, which has multiple drivers of steady growth with experience.

    SMC Global: 3 stars
    This brokerage believes noted that digital is growing much faster than traditional business and that the company has adopted a mindful IT strategy for its future growth. "On the flip side, the company intends to raise Rs 702 crore from the issue, of which Rs 592 crore alone is offer for sale. Considering the P/E valuation on the upper end of the price band of Rs 166, the stock is priced at pre issue P/E of 32.46 times on its actual annualised FY20 EPS of Rs. 5.11. Post issue, the stock is priced at a P/E of 34 times on its EPS of Rs. 4.88. Looking at the P/B ratio at Rs 166 the stock is priced at P/B ratio of 8.77 times on the pre issue book value of Rs.18.92 and on the post issue book value of Rs 25.56 the P/B comes out to 6.50 times," it said.

    What does the management say...
    In an interview with ET NOW, Ashok Soota, Executive Chairman and Director of the company, said 76 per cent of his business was not impacted by Covid disruption. “I would not say that nothing got impacted, probably in Q1 everything got impacted to some extent. But it is less so. Edutech and hi-tech balance did get impacted but we are beginning to see recovery. Healthcare is one among the segments. Life sciences is also growing fairly rapidly and we are well positioned there," he said. Soota said Covid-19 has not given the company a ‘huge tailwind’ in terms of growth and said his company's growth this year will not be like last year’s growth. That said, he expects the industry to recover next year.

    “There will be pent-up demand and our growth rates will go back to normal and above,” he said. On why listing now, Soota said running a public company brings about corporate governance, transparency, disclosures at a much higher level. He said his company was not in favour of going for additional rounds of private equity, raising market cap up to some huge levels and “find that you got no headspace left for the new retail investors when they come.”

    What does the company do...
    The company offers three services: Digital Business Services (DBS); Product Engineering Services (PES) and Infrastructure Management & Security Services (IMSS). Out of them, PES alone accounts for 51 per cent of the company's revenue). This segment assists software product companies in building products, platforms and services. The company’s DBS segment, which generates 27 per cent of total revenues, offers digital app design, development, package implementation and testing services. The IMSS segment delivers infra and security solutions with specialisation in cloud. This segment accounts for 22 per cent of the company’s revenues.

    Key competition
    The company sees global players such as EPAM, Endava and Globant as its competitors. The digital firm has 157 active customers and derives about 77.5 per cent of its revenue from the US and 11.9 per cent from India. It had an employee base of 2,600 as of June 30.

    Customer Base
    The company had 24 customers in the $1-5 million range, and 1 customer in $10 million range. The company claims it has successfully implemented its business continuity plans including to achieve efficient work-from-home practices to ensure connectivity across the enterprise in the wake of the coronavirus.

    Key financials
    As IIFL noted, the company's revenue per employee, at $37,000 is much lower than Indian peers' $45,000-50,000 and Eastern European peers'. The company’s top 10 clients account for 48 per cent of revenues, with the top client alone contributing 12 per cent of its revenue. For FY20, the company’s utilisation rate stood at 77 per cent. Attrition was high at 19 per cent. After posting a net loss of Rs 22.47 crore in FY18, the company’s profit came in at Rs 14.21 crore in FY19 and Rs 71.71 crore in FY20. Revenue from operations increased 22.8 per cent compounded annually during the same period to Rs 698.21 crore. The company reported revenue of Rs 590.36 crore in FY19 and Fy462.89 crore in FY18. For June quarter, the company reported a net profit of Rs 50.2 crore on a revenue of Rs 177 crore.




    ( Originally published on Sep 07, 2020 )
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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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