The recent market debutant, whose shares were issued at Rs 166 a piece five months ago, hit a fresh record high of Rs 427 on Wednesday and is up 157 per cent since listing.
Nomura initiated coverage on the stock with a target of Rs 480, up 20 per cent over Monday’s closing price, as the IT firm may “continue to grow at 2 times the pace of largecaps and 1.5 times of mid-caps”. The company is a ‘consistent compounder,’ Nomura said while giving it a premium valuation over biggies TCS and Infosys.
Calling it a play on the fast-growing digital space, Nomura values the stock at 32 times estimated FY23 EPS of Rs 14.90. The brokerage expects Happiest Minds to to record dollar revenues CAGR of nearly 25 per cent over FY21-24, but is building in a lower EPS CAGR of 17 per cent as it believes EBIT margins would fall to 18 per cent by FY24 from 22 per cent in FY21 due to full impact of tax rate starting in FY22.
The brokerage said it likes the stickiness offered by PES and scalability offered by DBS/IMSS segments. It also believes that the IT firm may sustain EBIT margins, similar to mid-caps despite being one-tenth of their size.
“While the recent run-up in the stock is likely to limit the upside in the near term (2.5 times of the IPO price), we like Happiest Minds as we see it as a ‘consistent compounder’. Our 32 times target multiple is 20 per cent higher than the target multiple for Infosys and TCS and 10 per cent higher than 1-year forward average trading multiple of mid-cap IT services,” it said.
Digital contributed 97 per cent of Happiest Minds’ FY20 revenues, similar to EPAM Systems and Globant and ahead of the 40-50 per cent range for Indian IT service peers.
A Gartner study suggests that digital is likely to record 16 per cent 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 has strengths in Cloud, SaaS and Security, which together contributed 75 per cent of revenues as of FY20, led by its focus on partnerships with ISVs like Azure/AWS, Salesforce and McAfee,” the brokerage said.
The company’s client and vertical concentration is similar to midcap IT service players like L&T Infotech and Mindtree and has an active client base of 157 as of FY20.
“Average revenue/client at $6,15,000 is below $3-4milion at peers and we see potential to scale given: exposure to 38 clients with $1 billion-plus revenues provides access to large IT budgets;increased focus on account mining led by aligning sales incentives to cross-selling, focus on solution approach to clients’ problems; and investing in domain and consulting expertise and onsite presence,” the brokerage said.
On Wednesday, the scrip was trading 5 per cent higher at Rs 427.