To aim for riches is a basic human trait and there is no better place than the stock market to achieve it quickly, or so the belief goes. It is more so when something fanciful catches the attention about which few are knowledgeable.
The latest fever sweeping through the nation, other than Corona, appears to be digital. Happiest Minds Technologies more than doubled on Thursday after receiving bids 150 times the shares it offered in an IPO.
Investor euphoria is backed by the `uniqueness’ of the company that is `well-positioned’ to do earn profits in the world of digital. While 3,913 companies are available for trading on the BSE, there are few pure play digital businesses to buy.
While international financial markets are strewn with episodes of booms and busts, India’s own in a limited period since the liberalisation of 1991 are plenty.
Since the early 1990s when an insurance company clerk grabbed the headlines with his Toyota Lexus, there have been many cycles. Between the rise of Harshad Mehta and now, the Indian stock market has witnessed booms and busts in shadow banks, technology firms, real estate, and infrastructure companies. Now, it may well be the turn of digital.
During the tech bubble flower vendors to air conditioner manufacturers were valued for their software subsidiary rather than their main businesses. In the infra boom steel and cement makers were lapped up for the power plants they put up instead of the cash their main businesses generated.
Look no further than Reliance Industries which is now valued at $200 billion mostly for its Jio Platforms business about which few investors have a ignoring its oil and gas business. The digital fever is so pervasive that even the State Bank of India Chairman is peddling his less than a square inch app Yono as worth $40 billion when his 25,000 branches and lakhs of staff are worth about half that.
Investors are willing to pay any price, literally, to own a piece of India’s digital future. At the IPO price of Rs.166, Happiest Minds’ price-to-earnings was 31 times compared with listed peers TCS’ 26 times and Infosys’ 24.3 times, the offer document shows. Difference? It is `Born Digital, Born Agile.’ The Ashok Soota founded firm has no legacy to worry about after all. It’s a lean machine. It has more than doubled after listing.
Without doubt digital firms deserve better valuations than conventional technology firms. Globant, a Luxembourg based company with a revenue of $659 million for last year is valued at $7 billion. EPAM with a revenue of $2.29 billion is trading with a market cap of $18 billion and UK’s Endava with a $350 million revenue is at $3.1 billion. Happiest Minds with a revenue of $101 million last year is at $760 million.
While future earnings potential and the price-to-earnings ratio are key metrics investors look at, more often than not the `novel’ offerings are taken to stratosphere and then the inevitable gravity begins to play. Happiest may be among the early ones in a long list to whet the digital appetite of investors. Businesses would grow and earn profits, but investors get irrational.
Just blame it on the brevity of financial memory. In the Indian context, previous episodes of exuberance that did not end pretty bring up names such as DLF, Reliance Power, Punj Lloyd, Future Capital Holdings, and BGR Energy.
Soota, whose Mindtree IPO in 2007 was subscribed 102 times, may deliver yet another success with Happiest Minds, but the story may be no different when investors pile on to all and sundry digital offerings in coming months.
The legendary J.K.Galbraith captures the never-ending euphoria and misery.
“Financial disaster is quickly forgotten. When the same or closely similar circumstance occur again, sometimes in only a few years, they are hailed by new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be a few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that is part of memory at all, is dismissed as primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present,’’ wrote Galbraith.