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Review By Dilip Davda on September 2, 2020

•    HMTL is a versatile digital business, product engineering and infra management solution provider company.
•    It has established its niche with the successful execution of customer-centric developments.
•    HMTL has posted the growing pattern for its top and bottom lines.
•    Based on Q1 FY21 parameters, the issue is lucratively priced.

PREFACE:
Ashok Soota and his group have incorporated this company. It is well known that earlier Ashok Soota emerged as the leader and instrumental in the growth of MindTree which was incorporated in August 1999. Subsequently, this company was taken over by L & T group in the year 2019. Ashok Soota exited this company in 2010 itself and parted with his stake in the company to other founders.

ABOUT COMPANY:
Happiest Minds Technologies Ltd. (HMTL) is claiming to have been positioned as 'Born Digital. Born Agile'. It focuses on delivering a seamless digital experience to its customers. HMTL's offerings include, among others, digital business, product engineering, infrastructure management and security services. Its capabilities provide an end-to-end solution in the digital space. The company believes that it has developed a customer-centric focus that aims to fulfil their immediate business requirements and to provide them strategically viable, futuristic and transformative digital solutions.

HMTL helps customers in finding new ways to interact with their users and clients enabling them to become more engaging, responsive and efficient. It also offers solutions across the spectrum of various digital technologies such as Robotic Process Automation (RPA), Software-Defined Networking/Network Function Virtualization (SDN/NFV), Big Data and advanced analytics, Internet of Things (IoT), cloud, Business Process Management (BPM) and security.

As of June 30, 2020, HMTL had 148 active customers. Its repeat business (revenue from existing customers) has steadily grown and contributed a significant portion of its revenue from contracts with customers over the years indicating a high degree of customer stickiness. The company believes its agility and resilience has stood out in recent years. In the three months ended June 30, 2020, and in Fiscal 2020, it delivered 90.1% and 87.9% respectively of projects through the agile delivery methodology. Over the years and currently, during the ongoing outbreak of Novel Coronavirus, it has successfully implemented business continuity plans including to achieve efficient work-from-home practices to ensure connectivity across the enterprise.

As of March 31, 2020, HMTL had a Glassdoor rating of 4.1 on a scale of '1- 5', among the highest for Indian IT services companies (Source: Frost & Sullivan Report). The Company has been recognized and rewarded. In the Great Place to Work® survey for 2019, it has been ranked fourth in IT services, in India's Top 25 Best Workplaces for IT & IT-BPM and among India's Top 25 Best Workplaces for Women.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its long term capital requirements (Rs. 101 cr.) and general corpus funds,  HMTL is coming out with a maiden IPO with a combo offer of fresh equity issue (Rs. 110 cr.) and offer for sale. It consists fresh equity issue of approx 6626505 shares of Rs. 2 each and offer for sale of 35663585 shares. The issue opens for subscription on September 07. 2020 and will close on September 09, 2020. The company has fixed the price band of Rs. 165 - Rs. 166 per share. Minimum application is to be made for 90 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. HMTL mulls mobilizing around Rs. 697.79 - Rs. 702.02 cr. (based on lower and upper price bands) through this IPO. Issue constitutes 28.80% of the post issue paid-up capital of the company.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 3 to Rs. 26. It has also issued bonus shares in the ratio of 162 for 1 (Nov. 2011). The company also converted preference shares into equity in the ratio of 163 for 1 (in March 2020, May 2020 and July 2020). Preference shares were having a face value of Rs. 652 per share and were issued in the price range of Rs.4890, Rs. 5500, Rs. 5930, Rs. 6150, Rs. 6700 and Rs. 11410 per share between October 2011 and April 2018.  

The average cost of acquisition of shares by the promoters/ selling stakeholders is Rs. 24.91 and Rs. 34.68 per share. Post issue HMTL's current paid-up equity capital of Rs. 28.05 cr. will stand enhanced to Rs. 29.37 cr. With this IPO, HMTL is looking for a market cap of Rs. 2437.94 cr. approx. The issue is jointly lead managed by ICICI Securities Ltd. and Nomura Financial Advisory and Securities (India) Pvt. Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, HMTL has posted revenue/net profits (Loss) of Rs. 489.12 cr. / Rs. - (22.47) cr. (FY18), Rs. 601.81 cr. / Rs. 14.21 cr. (FY19), Rs. 714.23 cr. / Rs. 71.71 cr. (FY20). For Q1 of FY21, it has earned a net profit of Rs. 50.18 cr. on revenue of Rs. 186.99 cr. Thus after FY19, it has posted growth in revenue as well as net profits.

On a consolidated basis, for the last three fiscals, HMTL has posted an average EPS of Rs. 2.55 and an average RoNW of 3.1%. Based on HMTL's NAV of Rs. 23.7 as on June 30, 2020, issue is priced at a P/BV of 7 (on the basis of upper cap).

If we annualize the latest FY21-Q1 results (with super-profits) and attribute it on fully diluted equity post IPO, then asking price is at a P/E of around 12 against the industry average of 27. On the basis of its trailing earnings and paid-up equity as on March 31, 2020, the issue is priced at a P/E of around 31. Management attributed the rise in net profit for Q1-FY21 for their ongoing cost-cutting as well as rent reduction for its staffing parks following work from home strategy. Despite pandemic, they had around 77% business running smoothly and yielding rewards. Management is confident of maintaining reasonable growth in their net earnings.

BRLM's TRACK RECORD:
The two Book Running Lead Manager's (BRLM's) associated with this offer have handled 11 public issues in the past three years, out of which 5 closed below the issue price on listing date.

COMPARISION WITH LISTED PEERS:
As per offer documents, HMTL has shown TCS, Infosys, LTI and MindTree as its listed peers. They are currently quoting at a P/Es of around 27.5, 24.37, 27.52 and 25.04 (as on September 02, 2020). However, they are not strictly comparable on an apple to apple basis.

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