Stock Fundamentals

Happiest Minds IPO: Should you subscribe?

Vivek Ananth | Updated on September 05, 2020

Reasonable valuation and decent revenue visibility are key positives

Happiest Minds is a nine-year-old IT services company. The initial public offering (IPO) includes 3.57 crore shares as an offer for sale-- 2.73 crore shares held by CMDBII, and promoter Ashok Soota’s 84.14 lakh shares.

The IPO also includes a fresh issue of ₹110 crore which will be used for working capital purposes by the company. The IPO is priced at ₹165-166 per share. The lot size is 90 shares. Retail investors can invest only up 10 per cent of the issue size.

Happiest Minds IPO is priced at nearly 23 times its 2019-20 earnings.

Its valuation is lower than other listed mid-tier IT services companies such as Mindtree (26.6 times) and Coforge (erstwhile NIIT Technologies) (28.2 times). The IPO seems to be priced on par with larger Indian IT services companies such as Infosys (23 times), but Infosys is not a pure-play digital services company.

Compared to global pure-play, large-sized digital IT services providers such as Endava, EPAM and Globant, Happiest Minds’ valuation is cheap. Investors with a time horizon of up to three years can subscribe to this IPO.

Digital play

Happiest Minds provides information technology services. Nearly 97 per cent of its revenues (in 2019-20) came from digital services. This makes it a predominantly digital IT services provider with a focus on services like cloud infrastructure, software as a service, cyber security solutions, artificial intelligence and internet of things.

The company partners with independent software vendors, including Microsoft, Amazon Web Services, Intel, IBM, McAfee, Netsuite, Salesforce, Cloudlending and Pimcore, to develop its service offerings. It focuses on software development services for independent software vendors and technology companies.

Although the management has not specifically given any future guidance, revenue growth is expected to be around 20 per cent mark over the medium term. There has been a renewed demand for digital services ever since the pandemic broke out, and Happiest Minds being specialist in digital services is poised to benefit from large scale adoption of digital services. The digital services spends are expected to grow by 20 per cent CAGR till 2025 to around $2 trillion, according to Frost & Sullivan.



The company’s revenues have grown at nearly 23 per cent CAGR during the period between 2017-18 and 2019-20 to ₹698 crore. Most of this growth has come from its Product-engineering Services segment that grew 30 per cent CAGR. This segment makes up for 50.5 per cent of revenues as on June 30, 2020.

The two other segments — Infrastructure Management and Security Services, and Digital Business Solutions — saw a CAGR revenue growth of 24.8 per cent and 11.6 per cent, respectively, during the same period. Infrastructure Management and Security Services makes up 20.6 per cent of the company’s revenues, while Digital Business Solutions accounts for 26.0 per cent of its revenues.

In 2019-20, Happiest Minds earned around 77.5 per cent of its revenues from the US, 12 per cent from India and 11.4 per cent from the UK and the balance from other regions.

In terms of industry, over half of revenues comes from edutech, hitech and banking financial services and insurance verticals; edutech has been a key area of focus over the past three years. Although the company does serve travel and retail clients, its exposure is limited.

The company has reported a net profit in two out of the last three financial years. In the 2019-20, it reported a net profit of ₹71.7 crore. Its earnings before interest, tax, depreciation and amortisation margins were 1.6 per cent, 11.0 per cent and 15.8 per cent in FY18, FY19 and FY20, respectively.


Impact of pandemic

The company’s revenues took a knock due to the pandemic. For the quarter ended June 30, 2020, it reported revenues of ₹177 crore, with falling rupee offering some cushion.

Net profit for the quarter came in at ₹ 50.2 crore. Creation of a deferred tax asset of ₹17.8 crore boosted the net profit for the quarter. The company managed to save some costs due to work from home and cutback on its sales and general administration costs. This led to an EBITDA margin of 25.6 per cent. This level of margins may not be sustainable, and it might normalise to 18-19 per cent, according to the management.

Other factors

There are certain matters in the prospectus that investors should note. One, the company used its securities premium balance to write off accumulated losses in November 2019, through a special approval of the National Company Law Tribunal. According to the management, they wrote off the accumulated losses to enable it to pay dividends to its shareholders in the future. The management told BusinessLine that this was a one-time transaction.

Two, the promoter group has pledged nearly 29 per cent of its holding for a loan to buy out a previous shareholder. This pledge will be removed once the shares are listed, according to the management.

There is also a case of discriminatory employment practices that was filed against the company by an individual which is currently pending in courts.

Published on September 05, 2020

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