Happiest Minds IPO to open on September 7: Should you subscribe?

"Given Happiest Minds Technologies' growth profile and over 97 percent digital revenue share, we believe the company can comfortably command a PE of 24x-25x, which makes the IPO valuation fairly attractive for long term investors. We recommend a subscribe to the issue, with the potential for healthy listing gains as well as long term stock price appreciation," KR Choksey said in its research report written by Lead Analyst, Harit Shah.

At the price band of Rs 165-166, the brokerage feels Happiest Minds issue is priced at a PE of 16.5x-17.3x FY22E EPS, assuming a 15-20 percent profit before tax (PBT) growth in FY22 and factoring in 25 percent tax rate for the year, as mentioned by management. Based on these calculations and assuming 2 scenarios of 15 percent and 20 percent growth, HMT can achieve diluted EPS of Rs.9.6-10.0 in FY22, on the basis of which the PE multiple works out to 16.5x-17.3x FY22E EPS, according to research firm.

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KR Choksey believes there is a high probability of Happiest Minds achieving this growth, which is likely to be led by revenue growth aided by continuing robust traction in digital services, rising investments by clients in these services to transform their businesses, differentiated business model and vertical focus, along with growth recovery from Q2FY21 after flat YoY revenue in Q1FY21.

Prashanth Tapse, AVP Research at Mehta Group also believes Happiest Minds IPO offer gives investor a unique opportunity to own a digital product engineering company.

As he sees digital engineering business is growing much faster than traditional IT business and it is well positioned to overcome the business challenges due to the COVID-19 pandemic with high exposure into 'edutech' and 'high tech' verticals which have grown faster during the pandemic and enabling the company to grow at around 20 percent YoY whereas the industry has slowed down to around 8-10 percent, he is optimistic on Happiest Minds for medium to long term play.

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On valuations parse at upper price band (Rs 166), the issue is asking for market cap Rs 2,438 crore with PE (FY20) 26 times, which seems to be fairly and reasonably prices with something on the table for listing gains, said Tapse who advised investors to subscribe to this offer.

Happiest Minds is a decade old digital services company based out of Bengaluru and is a strong brand in the digital IT services space. It is an IT servicing company which applies agile methodologies and focuses on delivering seamless customer experience, business efficiency and actionable insights. Its business is divided into three categories namely Digital Business Service (DBS), Product Engineering Service (PES) and Infrastructure and Management Security Service (IMSS).

These services are delivered across industry sectors such as retail, edutech, industrial, BFSI, hi-tech, engineering R&D, manufacturing, travel, media and entertainment, and others.

In Fiscal 2020, 96.9 percent of the company's revenues came from digital services which is one of the highest among Indian IT companies. As of June 30, 2020, Happiest Minds had 148 active customers and has a global presence in countries like US, UK, Australia, Canada and the Middle East.

Astha Jain, Senior Research Analyst at Hem Securities, too, likes Happiest Minds' scalable business model which has multiple drivers of steady growth with experienced leadership focused on sound corporate governance practices. Therefore, looking after all, she recommended subscribing the issue both for short & long term horizon.

On the financial front FY18-20 revenue growth stood at 23 percent on a CAGR basis while profit witnessed a steady growth from Rs 14 crore in FY19 to Rs 72 crore in FY20 due to increase in sales, lower operating expenses and 50 percent reduction in interest cost in FY20. However, Q1FY21 numbers came flat at Rs 177 crore and on an annualized basis just showing a 1 percent growth in FY21 estimates.

As per the management 76 percent of the business was not impacted by COVID-19 pandemic which is positive for long term, Vinod Nair, Head of Research at Geojit Financial Services said, adding based on FY20 EPS the P/E works out to be 26x which is close to largecap IT players.

Global direct peers based on digital revenue as per the RHP which are listed in respective markets trades at steep premium on a 1 year forward P/E basis (Globant : 61x, EPAM: 48.8x, Endava: 38.8x).

"If we annualize the Q1FY21 numbers and based on the EPS P/E works out to be 12x which is attractive compared to global as well as domestic peers. Given the strong management as Ashok Soota co-founder of Mindtree being the promoter and potential for growth in the digital space post the pandemic era and attractive valuation we recommend a subscribe rating on the IPO for long term perspective," Nair said.

Promoter and founder Ashok Soota is the Executive Chairman and Director of the company. Prior to founding Happiest Minds, Ashok was the founding Chairman and Managing Director of MindTree which was acquired by L&T Group. He was the vice chairman of Wipro and senior vice president of Shriram Refrigeration Industries prior to co-founding MindTree.

Among others, Choice Broking and AUM Capital also advised subscribing the IPO, while SMC Global Securities has given "three' star to IPO.

The public issue will close September 9 and bids can be made for minimum of 90 equity shares and in multiples of 90 shares thereafter.

Happiest Minds will utilise the net proceeds from fresh issue towards long term working capital requirement and general corporate purposes.

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