Much has been said about the retail frenzy for stocks lately, thanks to the sharp rally in equities since April. The number of demat accounts has risen sharply, signifying that more retail investors are trying their hand at direct investing, as opposed investing through equity mutual funds, where flows have fallen.

The high levels of interest in the Happiest Minds further confirms this trend, and in fact raises questions if the retail frenzy is near its peak. Investors aren’t too worried about the fact that the company’s growth rates don’t quite warrant the valuations being demanded in the IPO. They are content that the issue ticks a number of other boxes. “As of now the digital theme is very attractive, and investors are excited that most of the company’s revenues come from digital services. The promoter also has a good reputation in the market,” says Nitin Rao, founder, alphaideas.in.

It’s another matter that the high digital exposure hasn’t led to superior growth rates in the past. Happiest Minds’ revenues grew at a CAGR of only about 17% in the last two fiscal years in dollar terms. CAGR is Compound Annual Growth Rate. In comparison, Larsen & Toubro Infotech Ltd (LTI), with a larger revenue base, clocked much faster growth of 30% per annum in the same period in digital revenues.

There is an interesting spin to this in the issue prospectus, which goes something like this – lower growth rates in the past result in a low base, and sets up a firm for better growth rates ahead.

“Organisations with higher proportion of revenues from digital services (100% of revenues from digital)… (have a) higher CAGR of Revenues (26% to 36%). With higher digital revenues and lower revenue growth rates, Happiest Minds has tremendous scope for improvement,” says the company’s red herring prospectus. True to its name, it reads like a red herring.

“Investors also need to weigh in significant leadership and management churn in the company through recent years,” point out analysts at Emkay Global Financial Services in a note to clients.

But none of these concerns are reflected in the IPO’s valuations. The Happiest Minds IPO is priced is priced at 30.6 times FY20 diluted earnings per share (EPS), higher than 28.8 times the market is ascribing to LTI.

One justification for relatively higher valuations than Indian IT services companies is that shares of digital-focused global peers Globant, EPAM and Endava trade at much higher valuations. But these companies also actually report higher growth rates than traditional IT services companies. Of course, none of this matters to the retail investors who are climbing over one another to buy this IPO.