The retail portion of Happiest Minds Technologies Ltd’s initial public offering (IPO) is selling like hotcakes. Retail investors can buy 4.2 million shares in the IPO. They have already bid for more than 164 million shares and there is still one day left for the book creation process.
There’s been a lot of talk about the retail frenzy in stocks lately, thanks to the strong rally in stocks since April. The number of demat accounts has risen sharply, which means that more retail investors are trying direct investing, rather than investing through equity mutual funds, where flows have fallen.
High levels of interest in Happiest Minds further confirm this trend and indeed raises questions if the retail frenzy is near its peak. Investors are not overly concerned that the company’s growth rates do not justify the valuations required in the IPO. They are happy that the problem ticks other boxes. “As of now, the digital theme is attractive and investors are excited that the majority of the company’s revenue comes from digital services. The developer also has a good reputation in the market, “said Nitin Rao, founder of alphaideas.in.
Another issue is that high digital exposure has not led to higher growth rates in the past. Happiest Minds revenue grew at a compound annual growth rate (CAGR) of only about 17% over the last two fiscal years in dollar terms. By comparison, Larsen & Toubro Infotech Ltd (LTI), with a larger revenue base, posted much faster growth of 30% annually in the same period in digital revenue.
There is an interesting twist to this in the issuance prospectus, which goes something like this: lower growth rates in the past resulted in a low base, and this sets a company for better growth rates in the future. “Organizations with a higher share of digital service revenue (100% of digital service revenue) … (have a) higher CAGR of revenue (26% to 36%). With higher digital revenue and lower revenue growth rates, Happiest Minds has enormous room for improvement, “read the company’s red herring prospect. True to its name, it reads like a red herring.
“Investors should also be aware of the significant leadership and management turnover in the company over the past few years,” analysts at Emkay Global Financial Services note in a note to clients.
But none of these concerns are reflected in the IPO’s valuations. Happiest Minds’ IPO is priced at 30.6 times FY20 diluted earnings per share (EPS), higher than the 28.8 times the market attributes to LTI.
One justification for the relatively higher valuations than Indian IT services companies is that the stocks of digitally focused global peers Globant, EPAM and Endava trade at much higher valuations. But these companies also have higher growth rates than traditional IT services companies. Of course, none of this matters to retail investors who are beating each other to buy this IPO.
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