Happiest Minds Ltd IPO: Reason for Subscribing to the IPO

Subscription Dates Sep 7, 2020 - Sep 9, 2020

Price Band 165 to 166 per equity share

Issue size 42,290,091 Eq Shares of 2 (aggregating up to 702.02 Cr)

Minimum bid (lot size) 90 Shares

Listing On NSE, BSE

About the Business

It’s the era of Technology Stocks. The tech stocks listed in United States of America popularly termed as FANG comprising of
Facebook, Amazon, Netflix, Alphabet since the beginning of year 2020 are trading higher by 35%, 74%, 56% and 16% respectively.

The newest IPO on the block is Happiest Minds. Happiest Minds is an Information Technology company engaged in delivering a
seamless digital experience to their customers. This company is positioned itself as “Born Digital. Born Agile”. In Fiscal 2020, 96.9% of
their revenues came from providing digital services. This is one of the highest among Indian IT companies.

The Frost & Sullivan Report estimates the global digital services market of USD 691 billion in 2019 to grow at a CAGR of 20.2% to USD
2,083 billion by 2025. One of the beneficiary of this industry growth as envisaged would be Happiest Minds.

It derived 78% & 12% of its revenues from US & India respectively for the fiscal year 2020. Further, the company derives 78% of its
revenues by providing offshore services. Offshore business for Indian IT services industry is generally at a higher margin than
onshore business primarily because personnel costs have been lower in India than in many other countries.

Customer Engagement has been Improving

Customer engagement for the company has been decent as their average revenue per customer has increased from USD 471,472
in Fiscal 2018 to USD 501,562 in Fiscal 2019 to USD 614,675 in Fiscal 2020 representing a CAGR growth of 14.2%.

Further, revenue per sales employee has increased from USD 1.4 million in Fiscal 2018 to USD 1.7 million in Fiscal 2019 and further to
USD 3.1 million in Fiscal 2020 representing a CAGR growth of a very healthy 48%. This gives operating to leverage to business and
helps improve their margin profile as the same set of employees are able to generate more sales.

Further, there are two pricing methods in which the company enters into a contract with client. One is fixed price contracts & the
other is material contracts. Fixed price contracts require them to take on more financial risk compared to time and material
contracts. For digital projects, the share of time and material contracts tends to be greater as these projects are iterative in nature.

81% of their contract structure mix is time & material contracts thus reducing the risks as involved in fixed price contracts.

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 Segmentation of Revenues & Growth Prospects
Happiest Minds derives its revenues from the following segments:

Revenue Segmenta�on FY18 FY19 FY20

Edutech 18% 21% 21%
Hitech 25% 21% 21%
BFSI 18% 18% 18%
Travel, Media &
Entertainment 11% 14% 17%
Retail 7% 7% 8%
Industrial 6% 8% 7%
Manufacturing 3% 4% 4%
Others 12% 7% 5%

As per Frost & Sullivan estimates, the edutech market is expected to witness a higher CAGR of 5% owing to the adoption of digital
solutions within the sector in the recent years and the momentum is expected to carry on going forward.

The advancements in IoT solutions and the ability to use advanced technology to predict and prevent industrial losses has led to
a significant increase in the adoption of technology solutions within the manufacturing sector, which is expected to grow at a CAGR
of 3.5% until 2025.

The benefits of e-commerce has been a successful use case for the retail sector which is already benefitting from automation and
machine learning solutions that have cut down costs and boosted sales equally. The technology spend in the retail sector is ex-
pected to grow at a CAGR of 3.5% from 2019 to 2025.
An all-round connectivity and realization of the need to shift from legacy technology to a digital environment is the major reason
for the expected market growth in the future.

This will immensely benefit the company to grow its revenues.

About the Issue

The issue size of the IPO is Rs 702 crore. Market capitalization on the basis of issue price for the company would be Rs 1900 crores.

The issue size of Rs 702 crore is bifurcated into offer for sale & fresh issue as seen in the table:

Total Issue
Par�culars (in crore) Size
Offer For Sale 592
Fresh Issue 110
Total Issue Size 702

About the Founders

Happiest Mind was founded in 2011 by Ashok Soota. Mr Soota is recognized for his contributions to the IT industry in India. Prior to
starting Happiest Mind, he was the vice chairman of Wipro, senior vice president of Shriram Refrigeration Industries Limited and
founding chairman and managing director of Mindtree Limited. It was during his tenure that Mindtree completed its successful IPO.

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 Financial Highlights

Financials at a Glance
Par�culars FY18 FY19 FY20
Revenue from Opera�ons 463 590 698
YoY Growth 28% 18%
Opera�ng Expenses 481 536 601
YoY Growth 11% 12%
Opera�ng Income (EBITDA) -19 55 97
EBITDA Margin -4% 10% 16%
Deprecia�on Expense 21 25 20
Finance Cost 10 16 8
Other Income 26 11 16
Profit Before Tax & Exception Item -23 26 85
Profit Before Tax Margins -5% 4% 12%
Exceptional Items- Impairment of Goodwill 0 13 11
Profit After Tax -22 14 72
Profit After Tax Margins -5% 2% 10%

Revenues for FY20 stood at Rs 698 Cr, growing 23% CAGR in the FY18-20 period. One of the reasons profits have jumped is revenues
have grown faster than expenses.

The biggest expense for an IT company is employee costs, these have grown by 11% as compared to growth of 23% in revenues. The
company is reaping the benefits of operating leverage as stated by revenue per sales employee above.

Profits in the last 2 years have also been hampered due to impairment of goodwill. The company had made acquisitions in the past
and over paid. Impairment charges in FY19 and FY20 were Rs 13 and 11 Cr.

Debt at the end of FY20 stood at 71Cr with the debt/equity ratio was 0.26.Cash and equivalents at the end of FY20 stood at 228 Cr.

Valuation

The diluted earnings per share for FY20 considering the fresh issue stands at Rs 6.3. Considering the issue price of Rs 166, the
price/earnings ratio for the issue price turns out to be 26 times.

At these expected valuations of 27-28X, the IPO is valued close to its Indian peers.

Given the runway for digital services & technological transformations business are going through, we believe the company has
long way to grow.

Our View

Given the management pedigree and runway ahead of the company,

we suggest to Apply for the IPO.

Happy Investing!
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