Happiest Minds is founded by IT veteran Ashok Soota who was previously the founding chairman of MindTree and under whose tenure Mindtree IPO was subscribed 103 times and listed at 50% premium
Even though domestic markets are weak, the IPO market has been buzzing. Happiest Minds Technologies’ (HMT) is coming with its over Rs 700-crore initial public offer that will open on September 7 and close on September 9. The company, which draws almost all of its sales from digital, saw total income & EBITDA grow at a CAGR of 20.8% and 285.3%, respectively between FY18 and FY20. Happiest Minds is founded by IT veteran Ashok Soota who was previously the founding chairman of MindTree and under whose tenure the 2007 Mindtree IPO was subscribed 103 times and listed at 50% premium. Investors are expecting a repeat of the Mindtree IPO experience, given the fast growth from Happiest Minds that grew from zero to Rs 700 crore annual revenue in less than 10 years. Let us know about the important details about this offering. Read on.
Ashok Soota is the Executive Chairman and Director of Happiest Minds. He started Happiest Minds in August 2011 after leaving Mindtree, which he co-founded in August 1999. He practically grew Mindtree. Before that, he headed Wipro Infotech between 1984 and 1999 and at that time grew the IT business from $2 million to $500 million. Soota is the controlling shareholder of Happiest Minds. In fact, Soota and his family will own a little over 53% after diluting a 6%. The second largest shareholder JP Morgan CMDB II, a private equity fund (that has 19.4% stake) will exit through the IPO.
The IPO size is roughly Rs 702 crore at the upper band of Rs 166 per share. The Rs 702 crore size can be broken into a fresh issue of Rs 110 crore (66 lakh shares) and offer for sale of Rs 592 crore (3.56 crore shares). The offer for sale portion will see Soota selling 84.14 lakh shares while JP Morgan CMDB II will sell 2.72 crore shares. So, the total number of shares on offer are about 4.2 crore. The minimum lot size is 90, which means minimum IPO investment is Rs 14,940. The face value of each Happiest Minds share is Rs 2 apiece. At the Rs 702 crore IPO, Happiest Minds will have a starting market cap of about Rs 1,900 crore.
Right from 2011 when it was launched, technology services company Happiest Minds has 97% of its business coming from the Digital segment, which is highest even among mid or large tech peers. HMT has repeat business from its customer base, which includes more than 35 Fortune 2000/Forbes 200/billion dollar corporations. The company grew 19% year-on-year in FY20 with total revenues of Rs 714 crore. In total income in FY19 was Rs 602 crore and in FY18 was Rs 489 crore. You have to bear in mind the company has not been profitable in all the last 3 years (FY18, FY19 and FY20). The diluted EPS was -Rs 3.13 in FY, which improved to Rs +1.16 in FY19 and now at +Rs 5.36 in FY20. Of course, Q1 of FY21 saw a sharp jump and diluted EPS for the quarter stands at +Rs 3.7. SEBI deems companies, which haven’t been profitable in last 3 years, as risky for retail
investors and only 10% of the offer will be made available to retail investors.
At the higher end of the price band of Rs 166, the Happiest Minds IPO stock is available at a PE of nearly 31 times on FY20 diluted EPS. The Return on Net Worth (RoNW) is 27.1%. Do note that Happiest Minds company has a total debt of Rs 90.9 crore and cash of Rs 67.9 crore as on June 30, 2020. Trade receivables stand at nearly Rs 99 crore. Debt is not a problem for a company that generates cash flow from business. For the record, L&T Infotech was the last IT company to be listed and saw its Rs 710/share IPO oversubscribed over 11 times in 2016. At the IPO price band of Rs 705-710, the L&T Infotech stock was available at a multiple of 13 times (FY16 EPS). So, why is Happiest Minds asking for 31 times PE? In less than 10 years, Happiest Minds has reached Rs 700 crore annual revenue inorganically, showing the fast pace of growth. Its current RoNW is 27.1% compared to 25.4% for much larger Infosys, and 19.5% for Mindtree. Remember, that Happiest Minds can argue that it is yet to see the true scale of business given its small size.
Unlike many top IT companies, Happiest Minds does not have a CEO designate. Instead it makes do with an executive board that is said to be collectively functioning as the CEO. The company has earlier seen CEOs Vikram Gulati and Sashi Kumar exit. The Happiest Minds board consists of three former Mindtree executives Joseph Ananthraju (vice chairman designate), Chaluvaiya Ramamohan (president & CEO – IMSS), and Venkatraman Narayanan (ED & CFO). Another person on board is Rajiv Shah (president & CEO – DBS). It is said Soota does not interfere in everyday business. Too much dependence on Soota would be sub-optimal given his advanced age (77 years). When Soota left Mindtree, it was speculated that his step of making Mindtree manufacture mobile handsets by acquiring the India R&D centre of Kyocera Wireless had gone horribly wrong. At Happiest Minds, Soota hasn’t made the company into a product line of business and probably won’t, given previous Kyocera experience.
Happiest Minds has raised Rs 315.9 crore ($43.13 million) from IPO anchor investors like Singapore sovereign wealth fund GIC Pte, hedge funds and public markets funds managed by Avendus Capital, Sumeet Nagar-led Malabar Investments and IIFL Asset Management Ltd.
On paper, Happiest Minds IPO is a compelling one. It seems to be a fast-growing business and was started as a digital focussed business before even ‘digital’ was a buzzword. While experts see scope of improvement is Happiest Minds margin, fast growth does come at a cost. Given the company’s strong brand in digital IT services, end to end capabilities, robust R&D capability, key client account mining skills, the company appears well-placed for growth. The premium valuation will not look expensive if revenue growth keeps coming at this pace. We only see two main risks – one where Soota is no longer the chairman and that can expose any chink in the company’s armour, and two where any potential acquisition or M&A plan goes awry. In the past, Happiest Minds has completed two acquisitions, both of which worked out well. But big acquisitions can cause bigger problems.
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