Domestic brokerage firm YES Securities in its latest research note has initiated coverage on Happiest Minds Technologies with a "buy" rating and a target price of ₹1,018, reflecting an upside of 26.18% from the stock's current market price of ₹806.75.
Happiest Minds Technologies is a Bangalore-based IT services company that provides end-to-end solutions in the digital space. The stock got listed on the exchanges on September 17, 2020, at ₹351, as compared to the issue price of ₹166.
Despite turbulent times for Indian IT companies given the turmoil in the global financial system and slowing demand across key markets including the United States and Europe, the brokerage is optimistic about Happiest Minds. This is primarily due to the company's diversified revenue base and its strong presence in the digital business.
The following are some of the key reasons listed by the brokerage:
Dominant Presence in Digital Business: Happiest Minds Technologies has a predominant presence in the digital business, including Cloud, SaaS, Security Solutions, AI, IoT, etc., with digital revenue accounting for 97% of total revenue, which drives faster growth.
This factor makes Happiest Minds stand out against other IT companies as the long-term demand environment remains robust on account of the accelerated adoption of digital technologies.
High Offshore Effort Mix and Better Revenue Mix: The company has a 20%+ EBIT margin, which is significantly smaller than other Tier 2 IT companies, led by a high offshore effort mix of 96% and a better revenue mix with a dominant presence in the digital business.
However, the falling employee attrition, positive operating leverage, and improving employee pyramid are expected to support the operating margin in the near term.
Presence in Different Business Units: Happiest Minds operates through three business units, namely Product Engineering Services (PES), Digital Business Services (DBS), and Infrastructure Management and Security Services (IMSS).
PES is the company's largest segment, while DBS and IMSS provide scalability and annuity revenue streams, offering to cross-sell opportunities.
Diversified Revenue Base: The revenue base of Happiest Minds is diversified across industry verticals and geography, with the revenue mix diversified across Ed-Tech (23.2%), Hi-Tech (15.7%), Travel, Media, and Entertainment (13.1%), BFSI (10.3%), Retail (10.4%), Manufacturing (10.0%), and Others (8.2%).
The geographical breakup of revenue derives 67.5% of revenue from the US, 15.4% from India, 9.4% from Europe, and 7.7% from the rest of the world.
Strong Promoter Track Record: The management team of Happiest Minds is led by its founder and industry veteran, Mr Ashok Soota, with several decades of experience in the IT services industry.
He was also the founder of MindTree and previously served as Wipro's vice chairman. The promoter holding is 53%, and capital allocation remains prudent, with a return on equity of around 30%. The DSO at 60 days remains reasonable, with robust FCF conversion.
Solid Revenue Growth Outlook: Happiest Minds has a strong revenue growth outlook along with a superior margin profile, making it a credible play in the IT services space. It trades at a PER of 31.7x on FY25E.
The brokerage expects the revenue, EBITDA, and PAT to grow at a CAGR of 26.7%, 27.1%, and 27.1%, respectively, over FY22-FY25E.
Meanwhile, in the last two years, the stock has delivered a strong return of 54.55%, moving from ₹522 apiece to ₹806.75.
02 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.