Nomura initiates coverage on Happiest Mind Technologies with a Buy rating and target price of Rs 480
Happiest Minds Technologies is led by its executive chairman, Ashok Soota, and a credible team with 1-2 decades of experience in IT services that has held leadership roles and P&L responsibility at larger peers like Wipro, Mindtree EDS and MuSigma.
Happiest Minds Technologies is led by its executive chairman, Ashok Soota, and a credible team with 1-2 decades of experience in IT services that has held leadership roles and P&L responsibility at larger peers like Wipro, Mindtree EDS and MuSigma. Happiest Mind share price today is Rs 554, up Rs 71 or 15%.
Nomura initiates coverage on Happiest Mind Technologies with a Buy rating and target price of Rs 480, based on 32x FY23F EPS of Rs 14.9. Nomura expects Happiest Mind Technologies 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.
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Nomura expects Happiest Mind Technologies to trade at a premium as they think it will continue to grow at 2x the pace of large-caps and 1.5x of midcaps, led by the presence in the Digital segment. Nomura likes the stickiness offered by PES and scalability offered by DBS/IMSS. Nomura factors in its ability to sustain EBIT margins, similar to mid-caps (despite being 1/10th their size). While the recent run-up in Happiest Mind Technologies is likely to limit the upside in the near term (2.5x of the IPO price) says Nomura.
Nomura likes Happiest Mind Technologies as they see it as a ‘consistent compounder’. Nomura’s 32x target multiple is 20% higher than the target multiple for Infosys / TCS and 10% higher than 1-year forward average trading multiple of mid-cap IT services.
Digital contributed 97% of FY20 revenues for Happiest Mind Technologies, 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, Happiest Mind Technologies 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 Happiest Mind Technologies in the ‘Major Contender’ category in Security Services and in the ‘Aspirants’ category in IoT, Analytics and Product engineering.
Happiest Mind Technologies client and vertical concentration is similar to mid-cap IT service players like Mindtree/LTI and has an active client base of 157 as of FY20.
Average revenue/client at USD 615 k is below USD 3-4 mn at Mindtree/LTI and Nomura sees potential to scale given:
1) exposure to 38 clients with USD1bn+ revenues provides access to large IT budgets
2) increased focus on account mining led by aligning sales incentives to cross-selling, focus on solution approach to clients’ problems
3) investing in domain and consulting expertise and onsite presence
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