The retail portion of Happiest Minds Technologies Ltd’s Initial Public Offering (IPO) is selling like hot cakes. Retail investors can buy 4.2 million shares during the IPO. They have already made an offer for more than 164 million shares, and there is still a day to prepare the book.
Much has been said about the retail frenzy for stocks lately, thanks to the strong rally in stocks since April. The number of demat accounts has grown sharply, which means that more and more retail investors are dabbling in direct investment, as opposed to investing through equity mutual funds, where the flows decreased.
The high level of interest in the Happiest Minds further confirms this trend and in fact raises the question of whether the retail frenzy is nearing its peak. Investors aren’t too worried that the company’s growth rates don’t quite justify the valuations demanded during the IPO. They are happy that the problem ticks a number of other boxes. “From now on, the digital theme is very attractive and investors are delighted that most of the company’s revenue comes from digital services. The promoter also has a good reputation in the market, ”says Nitin Rao, founder of alphaideas.in.
This is another problem that strong digital exposure has not led to higher growth rates in the past. Happiest Minds revenue has grown at a CAGR of only about 17% over the past two years in dollars. The CAGR is the compound annual growth rate. In comparison, Larsen & Toubro Infotech Ltd (LTI), with a larger revenue base, experienced much faster growth of 30% per year over the same period of digital revenue.
There is an interesting twist to this in the issue prospectus, which goes something like this – lower growth rates in the past translates into a weak base and sets up a business for better growth rates at come.
“Organizations with a higher proportion of revenue from digital services (100% of revenue from digital) … (have) a higher revenue CAGR (26% to 36%). With higher digital incomes and lower revenue growth rates, Happiest Minds has huge room for improvement, ”the company’s prospectus states. True to its name, it reads like a red herring.
“Investors must also weigh in on the leadership and management of the company in recent years,” said analysts at Emkay Global Financial Services in a note to clients.
But none of these concerns are reflected in the IPO valuations. The Happiest Minds IPO price is 30.6 times FY20 diluted earnings per share (EPS), more than 28.8 times the market attributable to LTI.
One rationale for relatively higher valuations than Indian IT services companies is that stocks of global digitally focused peers, Globant, EPAM and Endava, are trading at much higher valuations. But these companies are also showing higher growth rates than traditional IT service companies. Of course, none of this matters to retail investors going out of their way to buy this IPO.