IPO Mart
IPO mart is buzzing once again as stock markets bounce back smartly from March lows. Come Monday, Happiest Minds Technologies is coming out with its Rs 700 crore issue. But before hitting 'subscribe' to the issue, here are a few things you must know:
About the company
Happiest Minds Technologies is a mid-tier IT services provider headquartered in Bengaluru. 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 is promoted by Ashok Soota, one of the co-founders of Mindtree.
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. It had 24 customers in the $1-5 million range, and 1 customer in $10 million range.
A look at the financials
For the June quarter, the company reported a net profit of Rs 50.2 crore on a revenue of Rs 177 crore. The company had posted a net loss of Rs 22.47 crore in FY18 and its FY19 and FY20 profit came in at Rs 14.21 crore and Rs 71.71 crore respectively. 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 Rs 462.89 crore in FY18.
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.
Risks
The company's financial performance over the past three years appears to be erratic. Given its smaller size, business scalability may be an issue amid intense competition. In the June quarter, revenue was Rs 177 crore while net profit was Rs 50.2 crore helped by lower operating expenses. Such a high net margin at 28% may not be sustainable. After annualising the June quarter net profit, the IPO is valued at a price-earnings (P/E) multiple of 12 on post-IPO equity. Keeping in mind the sharp jump in the profit during the quarter, which may not sustain, and small scale of operations, the valuation looks rich.
“The pricing of the issue is very high. On a long-term basis, the stock may not be very attractive. But given the strong growth shown by the company in FY20, and huge demand for midcap and smallcap IT stocks these days, risk-taking investors can consider the issue for a short-to-mid term basis,” said Vinod Nair of Geojit Financial Services.Valuations
At the price band is Rs 165-166, the stock commands a P/E value of 26.6 times FY20 P/E, which is comparable to its larger mid-cap peers such as LTI, Mindtree and Coforge and at a discount to faster growing Eastern European companies, said IIFL.
“The company has shown strong growth in its financials in the 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 experienced leadership focused on sound corporate governance practices,” said Astha Jain of Hem Securities.