by In September 2020 this company launched the IPO at a price band of rupees 165 and guess what the IPO was subscribed 151 times and the share was listed at rs 351 giving a 111 percent gain on a listing day. This was the biggest listing gain in the decade.
Over the past few weeks, I have received multiple requests to write an article on the happiest minds so here I am with a detailed analysis of this IT stock. Since the listing gain of 111 percent on day one.
This company has not stopped and it is currently trading at rs 1450 giving almost two hundred percent return on top of hundred and eleven percent return making a total return of 425 percent over the IPO price within 2.5years.
Those lucky folks who got the IPO allotment and did not sell the share are currently sitting on a profit of 425 within 2.5 years unbelievable isn’t it but what is so special about this IT company? what exactly is its business? who are the promoters? and what is the future we will discuss everything in this article.
In this article, we will do a fundamental analysis of Happiest Minds, as usual, we will cover the company and the management of happiest minds, its competitive strength, its key risk, future growth prospects, and financials based on the analysis we will decide if the happiest minds are fundamentally strong or not then we will do the valuation analysis of happiest minds to decide if it is worth investing in the company at current levels or not.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Introduction
Happiest Mind was established in 2011.
Happiest Minds is an IT company that specializes in digital transformation infrastructure, security, and product engineering solutions.
Basically, when we say digital transformation, it includes services like IoT that is the Internet of Things, Cloud Computing, Big Data Analytics, Process Automation, Artificial Intelligence, blockchain, etc.
If you look at the tagline of happiest mind it says “Born Digital Born Agile”.
Let me help you understand what exactly it means clearly when it says born-digital, happiest mind is focused on digital business that is the disruptive technology of the world that are in high demand with a bright future.
In fact, 97 of the business of happiest mind is from digital services.
96 percent of the revenue of a company is from digital business.
When it says Born Agile, it means Quick to Adapt.
Agile is a methodology, that essentially means being active and doing things in pieces that are also known as a sprint rather than doing everything together it is very important for a business to be agile.
Because in technology you need to unlearn and relearn and adapt to changes quickly in fact more than 90 percent of the business of a company is from agile methodology.
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Fundamental Analysis of Happiest Minds
Fundamental Analysis of Happiest Minds is as follows:
Revenue Breakup
- If we dig deep and look at the revenue breakup of digital business of Q3 and FY21
- 41 business is from digital infrastructure, and cloud services.
- 21.6 percent revenue is from SAS that is a Software as a Service
- 8.7 percent is from security.
- 14.4 percent is from analytics and AI.
- 11 percent is from IoT, and 3.4 is from others.
- Happiest Mind catered to a wide range of industries.
- If you look at the revenue break up for Q3 and FY21 by industry.
- 24.9 of the business is from Edutech Industry.
- Edutech is the most promising sector in today’s time.
- 20.2 percent of business is from the high-tech sector.
- 17.4 is from the BFSS that is the banking and financial service sector.
- 14.4 percent is from TME that is telecom media and entertainment which is again a hot sector and the rest is from retail manufacturing, etc.
In terms of geography, 72.2 percent of the business of Happiest Minds is from America.
10.6 percent is from Europe and only 13.4 percent is from India.
Key Metrics of Happiest Minds
Let me discuss some of the key metrics that are specific to the IT sector are as follows:
1. Utilization Percentage
- The first is utilization percentage so utilization basically means that out of 100 employees how many are on billable rules where client is paying money for the employee.
- It is a very important key in the IT sector.
- Higher the utilization better would be the profitability.
- Happiest Minds utilization percentage is very good you can see that the onsite utilization is about 75 percent, and the latest onsite utilization is 81.6 percent which is great.
- Offshore utilization is consistently above 95 percent.
2. Attrition Rate
- The next important key in the IT sector is the tuition rate.
- There is a higher attrition rate in the IT sector where employees keep switching companies but if you look at the attrition rate of happiest minds,
- It is consistently reducing it is reduced from 25.2 percent to 13.1 percent currently.
- In Q3 of FY21, if we compare it with industry-standard, it is a very low attrition rate it means relatively fewer people are quitting the job from the happiest minds.
- It is able to retain talent which is the biggest asset in an IT company.
Leadership
- Let’s look at the promoter profile of happiest minds.
- The happiest Mind promoter is Mr. Ashok Soota.
- Mr. Ashok Soota has more than 30 years of experience in the IT sector in India,
- During his initial days, he served as a president of Wipro, Infotech, between 1984 to 1999.
- He’s in the IT sector even before many of us were born during that period Wipro’s IT business grew from 2 million dollars to 500 million.
- Under his leadership, that’s 250 times jump in revenue later he co-founded Mind Tree in 1999 which is again a big IT giant today with a market cap of more than ₹ 61,665.39 crores, and then in 2011, Mr. Ashok Soota co-founded the happiest mind.
- Now you can imagine the kind of leadership and promoter pedigree we are talking about for happiest mind company has a strong focus on high governance and happiest minds call itself and mindful IT company that aims for happiest people and happiest clients.
- Currently, it has a market cap of around 20,134 crores. Overall on the company and its business, I would rate it 10 on 10.
Competitive Strength
- Competitive advantage is very important to sustain in the long term.
- If you look at the competitive strength of happiest minds.
1. Experienced Leadership
- The first strength is highly experienced leadership.
- The amount of rich experience Ashok Soota brings to the table with this 30 plus years of IT journey is exceptional.
- He has a brilliant track record of transforming Wipro and the amazing success of Mind Tree that he founded in 1999.
- He understands the need for good governance as well as the importance of future technologies in building a successful company.
2. Client Network
- The second strength is a strong client network
- The Happiest Minds has a very strong client network and just to give you an idea it has around 150 plus active clients and out of the 39 clients is a billion-dollar company.
- Happiest mind works with the top-notch companies of the world this explains the credibility of happiest minds.
3. Future Technologies
- The third strength is expertise in future technologies.
- Technology is the core of the IT sector and you need to keep yourself updated to stay relevant in the competitive world of the IT sector.
- You can’t work on old technologies the only way to grow is by building advanced technology capabilities.
- Happiest Mind is exactly doing that with technologies like IoT, cloud computing, big data, analytics automation, artificial intelligence, etc.
More than 96 percent revenue of Happiest Minds is from the digital business with the latest technology that gives a clear edge over the competitors. On top of this, the latest technology has a much higher margin that generates more profitability for the company.
Key Risk of Happiest Minds
Key Risk of Happiest Minds are as follows:
1. Successor Risk
- The first risk is with Happiest Mind is successor risk.
- Mr. Ashok Soota is 78 years old.
- It is very important for a leader to find the right successor who can take the charge in the future
- The same problem happened with Infosys after Narayan Murthy left then Infosys struggled to find the right successor.
- Happiest Minds currently has an executive board of four members that head the various division.
- It would be interesting to see who leads the company in the future.
2. Concentration Risk
- The second risk is concentration risk.
- While researching I found that 14.8 percent revenue of the company is from a single client.
- The top five clients contribute 33.5 percent in revenue.
- This creates a concentration risk as there is over-dependence on a selected few clients, hopefully, the company will take care of this in the future.
- Moreover, the majority of revenue is dependent upon the US that again creates concentration risk in terms of geography.
3. Talent Gap
- The third risk is the talent gap.
- One of the challenges in the IT sector is the availability of the right talent with the required skills.
- As the majority of technologies are relatively new it is not easy to find the right talent with the required capability.
- At the same time if there is a higher attrition rate in the future then it would cause a big risk.
Competitors of Happiest Minds
- If you look at the competitors happiest mind has strong competition from the other IT giants like TCS, Infosys, HCL, Wipro, Emphasis, Mind Tree, Capgemini, Cognizant, etc.
- The happiest mind has positioned itself as a new generation IT company with 97 percent revenue from digital business.
- Overall on competitive strength, I would rate it 8 on 10.
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Future Growth Prospects
- If you look in the future it is all about digital.
- Today everything is transforming into digital.
- Your education has transformed into Edutech.
- Retail has transformed into e-commerce.
- Finance has transformed into fintech and so on.
- Technology has become an integral part of our life.
- We probably can’t imagine a world without technology now it is just the beginning.
- The future is all about digital.
- On top of this covid has confirmed that the future is certainly digital technologies like cloud computing, the internet of things, automation, advanced analytics, artificial intelligence have already become a part of our daily life and would continue to grow.
- For example, the cloud computing market is expected to grow from 224 billion dollars in FY19 to 719 billion dollar by 25 at a cagr of 21.45 percent, IoT technology business is expected to grow at a cagr of 14.2 by 2025.
- Technologies like Artificial Intelligence and Machine Learning are expected to grow at 55 till 2025.
- The blockchain solution is expected to grow at 80 percent by 2025.
- India is already a global leader in IT services and has the right ecosystem to cater to this ever-growing demand for technology
- Even the government is pushing towards a digital economy with campaigns like Digital India.
- While other IT companies are still trying to increase the business from latest technology.
- The happiest minds are already drawing a revenue of 97 percent from the digital business.
- In one of the interviews last year Mr. Ashok Soota mentioned that he expects the happiest minds to grow at a CAGR of 20 percent that’s a fantastic growth rate.
- Overall on future growth respect, I would rate it 10 on 10.
Company Financials of Happiest Minds
Company Financials of Happiest Minds are as follows:
Revenue
- If you look at the revenue of happiest minds.
- It has grown from rupees 489 crores and FY19 to more than Rs 714 crores at a cagr of 20.8 percent which is great.
- The nine-month performance of FY21 till December 20 is rupees 576 crore.
Operating Margin
- Its operating profit has increased from 7.6 crores in FY18 to the current level of 113 crores in FY20 which is simply exceptional
- The nine-month performance of FY20 till December 20 is 187 crore.
- Overall on growth Prospect, I would rate it 10 on 10.
ROE and ROCE
- If you look at the profitability of the company.
- The latest ROE for FY21 is 42.18 percent and ROCE is 36.51 percent.
- It means the profitability is brilliant.
- Hence on profitability, I would rate it 10 on 10.
Debt to Equity Ratio
- The debt to equity of Happiest Mind is 0.17 which is very low.
- Hence on debt to equity, I would rate it 10 on 10.
Shareholding Pattern
- If you look at the shareholding pattern.
- Its promoter Mr. Ashok Soota has more than 53.25 percent stake in the company.
- Foreign institutions hold a 6.23 percent stake.
- Domestic institutions hold 4 percent.
- General public holds a 36.5 percent stake.
Valuations
- The Happiest Minds is currently trading at a price of 1481 at a PE of 147.51.
- The average PE of an IT company in India is around 38.46.
- Since Happiest Minds is a growing company it would continue to demand higher valuation and it would be difficult to find it at a PE of 20 to 30.
- Although at current levels It is looking slightly overvalued I think that happiest mind has a bright future and it will continue to grow at a very good rate. So it is worth investing in the company.
- A better strategy would be to invest periodically or buy on dips.
Conclusion
Overall if we conclude Happiest Minds has an excellent business and its management strong competitive advantage and solid financial and a very bright growth prospect which makes it a fundamentally super strong company.
It is currently available at a fair valuation. What is your take on Happiest Minds have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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