The initial public offer (IPO) of Bengaluru-based IT services provider Happiest Minds Technologies opened today with a price band at Rs 165-166 per share. The issue will close on closes on September 9 and the shares will be listed on September 17.
The Rs 702 crore-IPO comprises of fresh issue of Rs 110 crore and an offer for sale aggregating upto 3.56 crore equity shares. This includes 84 lakh equity shares by the company’s promoter Ashok Soota and another 2.72 crore shares by CMDB II.
The company said that it proposes to utilize the net proceeds from the fresh issue to meet long term working capital requirements and general corporate purposes. Investors can bid for a minimum of 90 shares and in multiples of 90 equity shares thereafter.
Most analysts are bullish on the company since 97 percent of its business comes from the digital services segment. They advise subscribing to the issue based on robust financial growth, attractive valuations and strong management.
The company, incorporated in 2011, is a Bangalore based IT service provider, which provides end-to-end solutions in the digital space. As of June 30, 2020, HMTL had 148 active customers and a presence in countries like US, UK, Australia, Canada and the Middle East. The experienced Ashok Soota, who is the Promoter, Executive Chairman and Director of HMTL, was also instrumental in the growth of Mindtree Ltd, in his previous stint as its CEO.
Here's what brokerages have to say about the IPO:
As per the brokerage, the company’s key business verticals include Edu-Tech, Hi-Tech, BFSI and Travel, Media & Entertainment. Over the years, the product engineering segment has clocked the fastest growth. Its FY20 the firm's revenue stood at Rs 698.2 crore (US$ 98mn) with an EBIT margin of 11 percent.
The brokerage recommends a 'Subscribe' rating on the IPO as it is a 'catalyst for multiple expansion': 1) Margins to expand, 2) Client mining, 3) Large Deal wins.
Key Risks include 1) Scalability, 2) Management transition, 3) Long tail of accounts.
"In FY20, the company had delivered 87.9 percent of its projects through the agile delivery methodology. Over the years and currently, during the ongoing outbreak of Novel Coronavirus, it has successfully implemented its business continuity plans including to achieve efficient work-from-home practices to ensure connectivity across the enterprise," the brokerage said.
Based on FY20 consolidated numbers, the issue is priced at a P/E of 31x at diluted EPS of FY20 which is priced fairly therefore it recommends 'subscribe' over the issue for a long term perspective.
Geojit Financial Services
The company's digital IT revenue is 97 percent of its overall revenue, which is the highest, among leading Indian IT firms. For FY18-20, revenue grew at 20.8 percent CAGR, while the company posted a net profit of Rs 71.70 crore in FY20 against Rs 17.36 crore in FY19.
In Q1, the company posted a revenue of Rs 186.9 crore and the PAT stood at Rs 54.51 crore mainly because of a rise in other income and reduction in rental costs due to work from home options.
The company also has a long-standing relationship with global independent software providers and some of its key partners include Microsoft, Amazon Web Services, NetSuite and Salesforce.
At the upper price band of Rs.166, HMTL is available at P/E of 34x FY20 which is at a premium when compared to its large and midcap peers. However, post annualizing Q1FY21 numbers we arrive at a P/E of 12xFY21 which seems attractive. With strong management pedigree and growth potential in a post Covid-19 scenario, Geojit recommends 'SUBSCRIBE' rating for this IPO with a long-term perspective.
"Over the years, the company has developed long-standing relationships with customers. The company gives significant attention to being able to understand the behavior, preferences, and trends of customers through research and a consultation process. It believe that this gives a distinct perspective that it brings to engagements. With this approach, it aims to become a key part of the customer’s operating and growth strategy, enabling HMT to serve customers across multiple touchpoints and projects," the brokerage stated in a note.
It added that expansion of relationships with existing active customers will remain a key strategy, going forward, as the company continues to leverage domain expertise and knowledge of emerging technology trends to drive incremental growth for business.
However, it cautioned that the adverse effects of the novel Coronavirus remain uncertain and could be severe. The outbreak of any other severe communicable disease could have a potential impact on business, financial condition and results of operations.
Also, the company’s revenues are highly dependent on a limited number of industry verticals. Any decline in demand for outsourced services in these industries, verticals could reduce revenues and materially adversely affect business, financial conditions and results of operations
At the higher price band, the issue seems to be fully priced as compared to its domestic peers. It earned an average 97.1 percent of the revenue from digital IT services as compared to its domestic peers, which earned in the range of 30-50 percent. Thus the company cannot be fully comparable to domestic peers. There are international peers, who derive almost all of their revenue from digital services are trading at a P/E multiple ranging from 67-139x. Assuming the valuations of these companies in the US markets to be frothy, the valuation demanded by the firm seems to be attractive. Thus, based on the above observations, it assigns a “SUBSCRIBE” rating for the issue.