Sturdy profitable growth potential led by 97% digital revenue share justifies valuation
At a time when the entire information technology (IT) space is seeing a re-rating, mainly due to strong demand for digital transformation, Happiest Minds Technologies’ (Happiest Minds’) initial public offering (IPO) is likely to be a good opportunity for investors. Sturdy profitable growth potential, led by 97 per cent revenue contribution from the digital business, which is also highest amongst the listed Indian IT players, would bode well for the IPO.
According to Urmil Shah, analyst at IDBI Capital, “There is immense growth opportunity in the digital business as many businesses are undergoing digital transformation. This presents strong growth opportunities for Happiest Minds going ahead. Thus, we believe the IPO brings good opportunity for investors.”
Business and financial
Headquartered in Bangalore, Happiest Minds was established in April 2011 by promoter Ashok Soota, one of the co-founders of Mindtree. Born as a digital company, Happiest Minds earns over 40 per cent of its revenue from edutech and hitech segments. Harit Shah, lead analyst at KR Choksey, believes that apart from the good track record of the promoter, Happiest Minds has a differentiated revenue factor as edutech and hightech are high growth verticals. He expects a high probability of the company achieving over 20 per cent growth in FY22 and the IPO seeing strong listing gains, giving healthy returns to investors in the long run.
With a higher digital share, the company grew at compounded annual growth rate of around 21 per cent in rupee terms and 17.1 per cent in US dollar terms during FY18-20. Lower base partly aided the strong growth. While, in June quarter (Q1) revenue remained flat at the year-ago level in rupee terms and was 8 per cent down year-on-year in US dollar terms mainly led by Covid-19 disruptions. On the profitability front, EBIT margin zoomed to 18.5 per cent in Q1 from 11 per cent in FY20 and 5.1 per cent in FY19. This was on the back of top-line growth resulting in healthy operating leverage. Thus, the company reported Rs 73.6 crore of pre-tax profit in FY20, close to a 6-time jump from FY19 and compared to Rs 23.1 crore loss before tax in FY18.
According to the management, FY18 was mainly affected by lower capacity utilisation, which improved in the subsequent years leading to improvement in profitability. According to Venkatraman Narayanan, executive director and chief financial officer at Happiest Minds, “While the company’s revenue growth in Q1 was slightly impacted by the coronavirus (Covid-19) pandemic, on an overall basis about 76 per cent of revenues comes from verticals, which have been unaffected.”
Remarking on the profits for the quarter and sustainable margins, he mentioned that while the higher EBIDTA margin (including other income) of 25.6 per cent in Q1 was aided by some tailwinds in terms of exchange rate benefits, reduced costs on account of work from home and a few one-time receipts, sustainable margins could be modelled at about 21-22 per cent.
While on FY20 earnings basis, valuation of the IPO is bit on the higher side. However, analysts believe the company’s growth potential justifies the same. Harit Shah, says with a 15-20 per cent likely pre-tax profit growth in FY22, the IPO’s valuation at 16.5-17.3 times FY22 estimated earnings is reasonable.
Amit Chandra, analyst at HDFC Securities also echoes similar views. “Given the high scope for growth and margin expansion with higher digital share, we believe the IPO is fairly priced,” he said.
While Soota’s successor is a key concern going ahead, sectoral de-rating could play a downside risk, according to some analysts.