Happiest Minds

CM RATING 51/100
Happiest Mind Technologies (HMTL), promoted in March 2011 by Ashok Soota, an IT veteran associated with Wipro as vice chairman and founding chairman of Mindtree, is a Bengaluru-headquartered IT services provider applying agile methodologies to enable digital transformation for enterprises and technology providers by delivering seamless customer experience, business efficiency and actionable insights. The company leverages a spectrum of disruptive technologies such as big data Analysis, artificial intelligence (AI) and cognitive computing, Internet of Things (IoT), cloud security, software-defined networking and network functions virtualization, Blockchain, and automation including robotic process automation.

The Born-Digital-Born-Agiles product engineering, digital business solutions, infrastructure management and security services cater to sectors such edutech, hi-tech, BFSI, industrial and manufacturing, and retail. There were about 2,448 IT professionals on the rolls, with average count of active customers of 148, end June 2020.

Offshore development centres are in Bengaluru, Pune and Noida in India, with operations in the US, the UK, the Netherlands, Australia and the Middle East. The US has historically been the single-largest market, accounting for a share of 77.5% of revenues in FY 2020 and 77.3% in Q1 of FY 2021. India accounted for 11.9%, the UK 7.2% and other 3.4% in FY 2020.

The three business units (BUs) are digital business services (DBS), product engineering services (PES) and infrastructure management and security services (IMSS). The PES BU focuses on engineering digital platforms. The DBS BU takes these platforms to market, while helping clients with their digital transformation journey. The IMSS BU manages and secures the digital infrastructure, spanning the entire digital lifecycle of the customers. PES accounted for 49.4%, DBS 26.8% and IMSS 21.5% of the total revenues in FY 2020. The balance 2.2% was other income.

The DBS drives the digital modernisation and transformation for the customers. The PES BU capitalises on the transformative potential of digital by building products and platforms that are smart, secure and connected. The IMSS BU provides an end-to-end monitoring and management capability with secure ring fencing of customers applications and infrastructure.

The three business units are supported by three centres of excellence: IoT, analytics and artificial intelligence (AI) and digital process automation (DPA). Revenues from IoT offerings comprised 8.4% of the total in FY 2019, 9.8% in FY 2020 and 9.3% in the June 2020 quarter. Revenues from AI were 9.1%, 11.6% and 12.1%. DPA revenues were 20.7% in FY 2020 and 24.1% in the June 2020 quarter.

There is long-standing relationship with global independent software vendors (ISVs) and technology companies to develop various key features of their product portfolios. Some of its current partners include Microsoft, Amazon Web Services, NetSuite, and Salesforce.

The initial public offer comprise fresh issue to raise Rs 101 crore and offers sale of 3,56,63,585 equity shares including sales by promoter of 2,72,49,362 shares. The net proceeds will be utilized to meet the long-term working capital requirement and general corporate purposes.

Strengths

Capability to offer solutions across the spectrum of advanced digital technologies. About 97% of the revenues are from digital services unlike established peers, for whom digital services contribute less than 50% of their overall revenues. The global enterprise digital spend stood at US$691 billion and represented about 16.3% of the total technology spend within the IT sector in CY 2019. The enterprise digital spend is projected to be around 34% of the total technology spend by CY 2021, with digital spending at a healthy CAGR of 20.19%.

Considerable resources have been invested in developing a proprietary suite of internal applications and tools to manage the delivery process to reduce risks such as security breaches and cost overruns. Control and visibility are provided across the project lifecycle stages to the customers. The Agile frameworks enable it to scale across the spectrum from ideation to production. As a result, teams are able to design, develop and test digital solutions, providing actionable insights into their value and business potential in a shorter timeframe, while customers are able to release products to market faster, respond better to market changes and incorporate customer and user feedback through subsequent releases and product iterations. About 88% of projects were delivered through the Agile model in FY 2020.

A strong customer base, with 148 active clients including more than 35 Fortune 2000, Forbes 200 and US$-billion corporations.

Revenues are grown through generating clients. The number of customers contributing more than US$ 1 million steadily increased from 16 in FY 2018 to 21 in FY 2019 and 25 in FY 2020. Moreover, the average revenue per customer is also on steady increase from US$ 471,472 in FY 2018 to US$ 501,562 in FY 2019 to US$ 614,675 in FY 2020.A high proportion is repeat revenues and revenues from mature markets. Repeat business accounted for 92.7% of the total revenues in FY 2020, 92.8% in FY 2019 and 81.7% in FY 2018.

Service contracts are under time-and-materials contracts, with materials costs consisting of travel and out-of-pocket expenses. About 81% of the revenues were from time-and-materials contracts, with the balance 19% being fixed price contracts in FY 2020.

The attrition rate has come down from about 25.2% in FY 2019 to 18.7% in FY 2020.

Weaknesses

Anti-outsourcing legislations and restrictions on work visas and permits, especially by the US, the main market, will remain an irritant.

Some of the agreements with customers contain time-based restrictions on reassigning personnel from those customers accounts to the accounts of competitors. These clauses may restrict ability to offer services to different customers in a specific industry or market.

Acquisitions of membership in the erstwhile subsidiary, the software business of OSS Cube Solutions, and the business of Cupola Technology were undertaken without obtaining independent valuation reports.

Certain inadvertent inaccuracies occurred in keeping records and delays in making certain regulatory filings.

A single customer in the US contributed about 12.2% of the revenues in FY 2020 and 14.8% in the quarter ended June 2020.

Pledged promoter (including promoter group) stake is 42071115 equity shares, which is about 49% of pre-issue promoter (including promoter group) stake. However, the funds being raised by promoters through the offer for sale is Rs 452 crore against which loan amount for which shares are pledged is Rs 40 crore.

Valuation

Consolidated revenues of Rs 698.21 crore in FY 2020 translated into a growth of 18%. Higher sales together with 460-basis-point expansion in the operating profit margins resulted in 77% jump in operating profit to Rs97.10 crore. After accounting for higher other income, lower interest and depreciation, profit before tax was up 232% to Rs 84.87 crore. Eventually, net profit surged a whopping 405% to Rs 71.71 crore, driven by lower extraordinary expenses (EO) on impairment of goodwill. ?

The consolidated EPS adjusting for EO on post-issue equity of Rs 29.37 at the lower price band and Rs 29.38 at the upper price band works out to Rs 5.6 for FY 2020. The asking price of Rs 165-166 discounts the EPS 29.5-29.6 times. The nearest comparable peer Mindtree quotes at a P/E of 31.5 times FY 2020 EPS. ?

Happiest Mind Technologies: Issue Highlights
Sector IT Services
Fresh Issue (in Rs. Crore) 110
Offer for sale (in Rs. Crore)
in Upper price band 592.0
in Lower Price Band 588.4
Price band (Rs.)
Upper 166
Lower 165
Post-issue equity (Rs crore)
in Upper price band 29.37
in Lower Price Band 29.38
Post-issue promoter (including promoter group) stake (%)
in Upper price band 40.43
in Lower Price Band 40.42
Minimum Bid (in nos.) 90
Issue Open Date 07-09-2020
Issue Close Date 09-09-2020
Listing BSE, NSE
Rating ?51/100

?

Happiest Mind Technologies: Consolidated Results ?
2006 (3) 2003 (12) 1903 (12) 1803 (12)
Sales 177.02 698.21 590.36 462.89
OPM (%) 21.4 13.9 9.3 -4.0
OP 37.85 97.10 54.83 -18.61
Other income 9.97 16.02 11.45 26.23
PBIDT 47.82 113.12 66.28 7.62
Interest 1.86 8.02 15.94 9.95
PBDT 45.96 105.10 50.34 -2.33
Depreciation 5.12 20.23 24.78 20.75
PBT 40.84 84.87 25.56 -23.08
EO Exp 0.00 11.26 12.58 0.00
PBT after EO 40.84 73.61 12.98 -23.08
Tax -9.34 1.90 -1.23 -0.61
PAT 50.18 71.71 14.21 -22.47
EPS (Rs)* 13.7 5.6 1.9 -1.5
EPS (Rs)** 13.7 5.6 1.9 -1.5
* on post issue equity on Lower price band of Rs 29.37 crore. Face Value: Rs 2
?** on post issue equity on Upper price band of Rs 29.38 crore. Face Value: Rs 2
?EPS is calculated after excluding EO and relevant tax
?# EPS can not be annualised due to seasonality in operations
?Figures in Rs crore
?Source: Capitaline Corporate database

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