Happiest Minds IPO a good chance to ride digital wave

At a time when the entire information technology (IT) space is witnessing rerating, mainly because of strong demand for digital solutions, Happiest Minds Technologies’ (Happiest Minds) IPO is likely to be a good opportunity for investors. Strong growth potential, led by 97 per cent revenue contribution from the digital business, which is also the highest among the listed Indian IT players, bodes well for the IPO.

According to Urmil Shah, analyst at IDBI Capital, “There is an immense growth opportunity in the digital business as many businesses are undergoing digital transformation. This presents strong growth opportunities for Happiest Minds.”

Business and financials

Headquartered in Bengaluru, Happiest Minds was established in April 2011 by promoter Ashok Soota — one of the cofounders of Mindtree. Happiest Minds earns over 40 per cent of its revenue from the edutech and hitech segments. Harit Shah, lead analyst at KR Choksey, believes apart from the promoter’s good track record, Happiest Minds has a differentiated revenue factor as edutech and hitech are growth verticals. He sees a high probability of the company achieving over 20 per cent growth in FY22 and the IPO witnessing strong listing gains, giving healthy returns to investors in the long run.

With a higher digital share, the company grew at a CAGR of around 21 per cent in rupee terms and 17.1 per cent in dollar terms during FY18-20. In rupee terms, FY20 revenues stood ~698 crore; lower base partly aided strong growth. After posting a loss in FY18, profit before interest and taxes, and margins doubled from FY19 levels to ~77 crore and 11 per cent, respectively, in FY20. This was on the back of top-line growth resulting in healthy operating leverage. Thus, the firm reported ~73.6 crore of pre-tax profit in FY20, close to a 6x jump from FY19 and also against the ~23.1-crore loss before tax in FY18.

According to the management, FY18 was mainly affected by lower capacity utilisation, which improved in the subsequent years. According to

Venkatraman Narayanan, executive director and chief financial officer at Happiest Minds, “Though the company’s revenue growth in Q1 was slightly impacted by the Covid-19 pandemic, on an overall basis about 76 per cent of revenues come from verticals which have been unaffected.”

Valuation

On the FY20 earnings basis, the valuation of the IPO is on the higher side. Analysts say the company’s growth potential justifies the same. Shah of KR Choksey says with 15-20 per cent pre-tax profit growth in FY22, the IPO’S valuation at 16.5-17.3 times FY22 estimated earnings is reasonable. Amit Chandra, analyst at HDFC Securities, says: “Given the high scope for growth and margin expansion with a higher digital share, we believe the IPO is fairly priced.”