Fortune Scrip

Growing faster than large caps : On cutting edge of infotech

The Information Technology sector is in fine fettle and is likely to remain on a strong wicket for quite some time. But when we think of the IT industry, we focus only on top-ranking stocks like TCS, Infosys, Wipro and HCL Technologies. However, there are now second rank companies that have tremendous growth potential. We have picked one of them as the Fortune Scrip for this fortnight.

It is Happiest Minds Technologies which has during the last one decade emerged as one of the strongest brands in digital IT services globally (last year, almost 96.9% of its revenues came from digital services). The company is the brainchild of the extraordinary Ashok Soota, who contributed significantly in developing Wipro and then promoted Mind Tree, which has today become the pride of the L&T group.

Happiest Minds focuses on delivering a seamless digital experience to its customers. It enables digital transformation for enterprises and technology providers by delivering seamless customer experience, business efficiency and actionable insight. The company does this by leveraging disruptive technologies such as Artificial Intelligence, Block Chain, Cloud, Digital, Process Automation, Internet of Things, robotics/drones, security, and virtual/augmented reality. Positioned as ‘Born Digital, Born Agile’, the company’s capacities span digital solutions, infrastructure, product engineering and security. It delivers these services across industry sectors such as automotive, BFSI, consumer packaged goods, e-commerce, edutech, engineering R&D, hi-tech manufacturing, retail and travel/transportation/hospitality. The company’s brand positioning is a reflection of digitization being built into the essence of its business.

In a very short span since it was floated in 2011, the company has made rapid strides on the financial performance front. During the last five years, its sales turnover has expanded from Rs 480 crore in fiscal 2017 to Rs 781 crore in fiscal 2021, with its profit at net level recording a mindboggling spurt from Rs 4.24 crore to Rs 162 crore during this period. The company’s financial position is very strong, with reserves as on March 31, 2021 standing at Rs 514.69 crore – more than 18 times its equity capital of Rs 28.37 crore! The company’s debt is also on the very low side, its interest payment for fiscal 2021 being not even 1% of its turnover. The company has entered the dividend list from fiscal 2021 with a bumper dividend distribution of 150%.

But we have not selected HMT for its past laurels. Its future prospects are all the more promising. Consider:

The company’s founder and Executive Chairman Ashok Soota, the 79-year-old grand old man of the Indian IT industry, is a visionary IT entrepreneur who took Wipro and Mindtree to great heights. He has high hopes about Happiest Minds and he wants to ensure that the unique IT services company thrives for generations to come. In order to secure the future prospects of HMT, he has evised a three-pronged strategy which includes ownership and business strategy.

Mr Soota had a bitter experience in the case of his previous venture Mindtree, which was ‘usurped’ by L&T as the promoters led by Mr Soota had only 13 per cent stake in the equity of the company. Now, he has maintained a 53 per cent stake in HMT and would like to transfer this stake to a private trust and a medical research trust. Trustees of these trusts will be mandated to exercise their votes regarding the management of the company. As far as the second dimension of leadership is concerned, Mr Soota’s plan relies on collective leadership. As far as business structure is concerned, the management has been asked to follow certain principles, including watching for secular shifts which change industry models and structures, always being on the leading edge of technology, and following the highest standards of governance.

The company under Mr Soota follows a dynamic customer relationship policy. Over the years, it has developed long- standing relationships with customers. The company gives significant attention to being able to understand the behaviour, preferences and trends of customers through a research and consultation process. Mr Soota believes that this gives a distinct perspective that HMT brings to engagements. With this approach, the company aims to become a key part of the customer’s operations and growth strategy, enabling HMT to serve customers across multiple touch points and projects. Expansion of relationships with existing active customers will remain a key strategy going forward, as the company continues to leverage domain expertise and emerging technology trends to drive incremental growth.

This customer relationship policy has helped the company to build up a strong customer base. Little wonder, HMT has repeat business from its customer base which includes more than 35 Fortune 2000/Forbes 200 billion-dollar corporations. The company’s broad range of offerings helps it to upsell while multiple business units help it to cross-sell to existing customers as well as to acquire new customers. Its average revenue per customer has increased from $ 471/472 in fiscal 2018 to $ 501/502 in fiscal 2019 and further to $ 614/615 in FY 2020. The company’s total income and EBITDA has grown at a CAGR of 20.8% and 285.3% respectively between these 3 years. As Mr Soota admits, “the company is currently focused on upselling and cross-selling its existing services rather than wooing new businesses.” According to Nomura, this momentum will continue to build as a result of the ramp-up in deals and partnerships that the company has been able to capitalise on. Nomura expects the company to continue to grow at nearly two times the pace of large caps like Tata Consultancy Services (TCS), HCL Tech, Infosys and Wipro, and 1.5 times the pace of its mid-cap peers, owing to its strong digital presence.

TIES WITH VENDORS

The company has strengthened its relationships with independent software vendors (ISVs) like Amazon AWS and Microsoft in the past 3-4 years. It has also established a ground connect with their technical account managers for prospective customers. In order to improve domain expertise and expand clientele, it has increased cross-selling to the existing clients of Microsoft Technologies. Moreover, alliances and partnerships have been its main source of lead generation. It plans to deepen its relationships with other ISVs, including Google Cloud, Sales Force, Appian and Mulesoft. Edutech is amongst the best performing segments for the company, whose revenue contribution increased from 18% in FY16 to 26.3% for 9MFY21. Also, Automation as a percentage of revenue has been constantly growing from 20.7% in FY20 to 25.5% for 9MFY21.

Recently, the company acquired Pimcore Global Services (PGS) to expand its digital e-commerce and data management solutions and partnered with Ilantus Technologies to enhance next-generation capability.

Happiest Minds can boast of a diversified mix of services, multiple long-standing client relationships spread across verticals, and healthy cash on the balance sheet. We expect it to pursue inorganic acquisitions (in digital e-commerce and data management solutions) and expect the company’s revenue to grow well in the long term. Further, a visible and consistent growth in the digital business has resulted in stable and consistent growth in the past fiscal, coupled with its legacy business performance. For long-term investors, this stock will prove to be a multibagger. Today it is quoted around Rs. 1254 as against the IPO offer price of Rs. 166 a year ago. There is mind boggling growth potential in this stock.

- Savyasachi