Happiest Minds Technologies: Initiate with ‘buy’; TP Rs 480

By: |
February 19, 2021 9:15 AM

Presence in fast-growing digital space plus partnerships with AWS/Azure and backed by credible management. Action.

Happiest Minds TechnologiesOur 32x target multiple is 20% higher than the target multiple for INFO/TCS and 10% higher than 1-year forward average trading multiple of mid-cap IT services.

Presence in fast-growing digital space plus partnerships with AWS/Azure and backed by credible management. Action. Initiating with a Buy rating and TP of Rs 480 (implies ~20% upside). We initiate coverage on HAPPSTMN with a Buy rating and TP of Rs 480, based on 32x FY23F EPS of Rs 14.9. We expect HAPPSTMN to record USD revenues CAGR of ~25% over FY21- 24F, but build in EPS CAGR lagging at ~17% on EBIT margins falling to 18% by FY24F (vs 22% in FY21F) and the full impact of tax rate starting in FY22F. We expect HAPPSTMN to trade at a premium as:

1) we think it will continue to grow at ~2x the pace of large-caps and ~1.5x of mid- caps, led by the presence in Digital, 2) we like the stickiness offered by PES and scalability offered by DBS/IMSS; and 3) we factor in its ability to sustain EBIT margins, similar to mid-caps (despite being 1/10th their size). While the recent run-up in the stock is likely to limit the upside in the near term (2.5x of the IPO price), we like HAPPSTMN as we see it as a ‘consistent compounder’. Our 32x target multiple is 20% higher than the target multiple for INFO/TCS and 10% higher than 1-year forward average trading multiple of mid-cap IT services.

Play on the fast-growing digital space; strengths in Cloud, SaaS and Security. Digital contributed 97% of FY20 revenues for HAPPSTMN, similar to EPAM/GLOB and ahead of the 40-50% range for Indian IT service peers. As per Gartner, Digital is likely to record ~16%+ CAGR over the next five years as clients accelerate investments in core transformation to expand product offerings, enhance productivity and drive better customer experience. Within Digital, HAPPSTMN has strengths in Cloud, SaaS and Security, which together contribute 75% of revenues as of FY20, led by its focus on partnerships with ISVs like Azure/AWS, Salesforce and McAfee. Everest rates HAPPSTMN in the ‘Major Contender’ category in Security Services and in the ‘Aspirants’ category in IoT, Analytics and Product Engineering.

Well-diversified client metrics and vertical presence; we see ability to scale accounts. HAPPSTMN’s client and vertical concentration is similar to mid-cap IT service players like LTI/MTCL and has an active client base of 157 as of FY20.

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