If you follow the Indian stock market in any way, you would have come across some news on Happiest Minds in the last week or so. The company just got listed on NSE and BSE. First, it was in the news because its IPO got subscribed 151 times and secondly, it opened with a listing gain of around 110%. As an investor, are you curious to know about the company? Sure you are, so let's dive deep into the business and the IPO of Happiest Minds.
Company business & founder
Happiest Minds was incorporated in 2011 as an IT service company. The business of the company is divided into three categories - Digital Business Service, Infrastructure and Management Security Service and Product Engineering Service. From the very start, the company has positioned itself as 'Born Digital. Born Agile'. The company is founded by Ashok Soota, who co-founded Mindtree in 1999 which is a billion-dollar company now. Before co-founding Mindtree, he has worked with Wipro for a very long time.
The company is listed now but to understand its future let us see who showed interest in the company at the time of subscription.
As mentioned, it was over-subscribed 151 times, here is the breakdown:
- 351.5 times by non-institutional investors(investors who invest through mutual funds, ULIP etc)
- 77.4 times by Qualified Institutional Buyers (investors who invest more than 1 lac)
- 70.94 times by retail investors(regular traders/investors)
Happiest Minds came up with a Rs 702 crore public issue with a share price of Rs 165- Rs 166. On September 17, it got listed at Rs 340.
Journey to IPO
It takes time for any company to come up with an IPO. Happiest Minds was able to achieve it in less than a decade, thanks to its success in the last three years. So let us look at its numbers from the recent past.
During FY18-20, the company’s revenue grew at a CAGR of around 21 percent in rupee terms and 17.1 percent in dollar terms thanks to its higher digital share. In rupee terms, revenues for FY20 stood Rs 698 crore. After posting a loss in FY18, profit (before interest and taxes) and margins doubled in FY20 from FY19 levels to Rs 77 crore and 11 percent, respectively. This was on the back of top-line growth that was the result of healthy operating leverage. The company reported Rs 73.6 crore of profit in FY20 (pre-tax), which is a 6X jump from FY19 and also a great leap against the Rs 23.1-crore loss before tax in FY18.
Customers - Size and location
Happiest Minds delivers services across many industry sectors such as Manufacturing, BFSI (Banking, Financial Services and Insurance), Hi-Tech, Industrial, Retail, Engineering R&D, Edutech, Travel, Media and Entertainment.
As per data available from June 30, 2020, Happiest Minds had 157 active customers and has a global presence in countries like the US, Canada, UK, Australia, and the Middle East. Most of its clients are from the US. Though the business of the company is divided into 3 categories, in the fiscal year 2020, 96.9% of the company's revenues came from digital services which is one of the highest among Indian IT companies. If you see their customer profile break, you will notice in FY20, it has 24 customers that generate revenue between $1 million and $5 million and only one customer that generates revenue over $10 million. Since it has 157 customers, it means the remaining 132 customers generate revenue less than $1 million. What does it imply? We will see that later.
Promoters hold 61.77% of the total stake. Ashok Soota holds the majority stake at 48.83%, the other major stakeholder is CMDB II (Venture Capitalist). In the below image you can see the promoter, promoter group and selling shareholder before the offer. So as part of the IPO, CMDB II is selling its complete 19.43% stake to the public.
Thoughts on the business of the company
The digital services market in India was $26 billion in 2019 and as per experts, it is expected to grow at 12% over the next 6 years and it will touch $50 billion in 2025. The global digital spend stood at $691 billion in 2019, 16% of the total technology spend within the IT sector. The market is expected to be $2,083 billion by 2025, growing at 20% and representing 34% of the total technology spend. Since most of the Happiest Minds revenue comes from Digital, the company's future looks promising.
Given the IPO was subscribed 151 times, it means most of the retail investors would have not received the shares. What you should do as an investor now? It is already 130% up from the issue price, should you buy it? If you were lucky to be allotted the shares, should you hold?
Without any doubt, Happiest Minds is a good company and has the potential to grow in the coming years. The management of the company is great and reputed. Also, the work culture of the company is amazing. The company is among the Top 25 India’s best workplaces to work for women.
As mentioned earlier, a lot of clients of the company are of small size. Given the current situation of the pandemic, it is still not clear how many of them will be able to continue giving business to Happiest Minds. This may impact the revenues of the company in the coming quarters.
- The company is trading (Rs. 365.10) above its fair value (Rs. 266.68), which is a good sign to sell/hold, its fundamentals(balance sheet, income statement, and cash flow statement) are average (2.5 out of 5).
- That’s why Stockylab has a sell call with 43% confidence, hold with 30% confidence and buy with 26% confidence.