Happiest Minds Technologies IPO: Digital exposure buoys company

The initial public offering (IPO) of Happiest Minds Technologies could not have come at a better time. With the shift to digital solutions picking up pace across the world amidst the pandemic, investors were keen to get in on the action. This was reflected on listing day, when the stock touched a premium of 111 per cent over its issue price.
 

The key sales pitch was the exposure to digital services, as it accounted for 97 per cent of revenues, and an experienced management, including Ashok Soota, who co-founded Mindtree. Given the higher growth trajectory of this segment, it was not a surprise that its revenues grew 20 per cent annually in the last three years. This is expected to continue with the company aiming to expand at twice the industry’s growth rate. Any accretive acquisitions will add to the growth rate.
 

Research and advisory firm Gartner expects the digital segment to grow over 16 per cent in the next five years, led by higher investments by corporate houses to enhance their product offerings, improve productivity, and the need to deliver on the customer experience front. Within digital, the company’s exposure to Cloud and software as a service (SaaS) accounts for about two-thirds of revenues.

 

One segment that got a fillip during the pandemic was education technology, which accounts for a quarter of the company’s revenues. It expects the surge in this segment to continue even after the pandemic.
 

Though the company is smaller than some mid-cap peers, its profitability, return ratios, and cash flows are in line or better than those of its peers. Given the high growth segments, improving operating leverage, highest offshoring (77.5 per cent) among peers and sharp cost reduction on travel and administrative costs, there has been a spurt in operating profit margin in recent quarters.

Margins in the last two quarters were in the 26-29 per cent band, compared with 16 per cent a year ago. However, margins are expected to moderate to 21-23 per cent going ahead, as some costs normalise.
 

The stock surge since listing (up 225 per cent) has taken valuations to nearly 40 times its FY23 earnings estimates. Investors can look at the stock on dips.