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Result Synopsis

Happiest Minds (HAPPSTMN) reported broadly inline financial performance for the quarter. Both, the sequential revenue growth and EBIT margin were inline with expectation. It reported constant currency growth of 1.3% QoQ(up 1.4% QoQ in USD terms, up 3.0% QoQ in INR terms), led by Hitech vertical( up 28.0% QoQ) and Manufacturing(up 10.2% QoQ). There was sequential decline in EBIT margin(down 72 bps QoQ) led by higher cost of revenue. Employee attrition continues to decline as LTM attrition decreased by 110 bps QoQ to 19.8%. Digital accounts for 96.3% of revenue as of Q4FY23 vs 96.5% as of Q3FY23.

The long term demand environment remains robust led by strong deal wins and robust deal pipeline. However, the clients especially in select sectors have become cautious regarding the evolving macroeconomic situation. The deal pipeline remains strong and it supports near term growth visibility. Management guidance of revenue growth of 25% in cc terms for FY24 with EBITDA margin band of 22-24% remains strong. Falling employee attrition is expected to support operating margin going ahead. We estimate revenue CAGR of 24.1% over FY23?25E with average EBIT margin of 21.3%. We maintain our BUY rating on the stock with revised target price of Rs 1,030/share based on DCF methodology. The stock trades at PER of 44.7x/35.3x on FY24E/FY25E EPS.

Result Highlights

* Reported revenue of Rs 3,780mn (up 3.0% QoQ in INR terms, up 1.4% QoQ in USD terms). The cc growth was 1.3% QoQ. The growth was led by Hitech vertical (up 28.0% QoQ) and manufacturing vertical (up 10.2% QoQ)

* Digital now accounts for 96.3% of revenue vs 96.5% as of Q3FY23

* EBIT margin decreased by 72 bps QoQ to 21.0%, led by increase in Cost of Revenue (up 4.4% QoQ).

* Offshore revenue mix grew by 70 bps QoQ to 84.8%. 16 new clients added during the quarter. Total Active Customers increased by 7 QoQ to 237.

* Net employee addition stood at 306 employees during the quarter to close at 4,917 employees. LTM attrition declined by 110 bps QoQ to 19.8%. Employee utilization was 74.6% as of Q4FY23 vs 80.1% as of Q3FY23.

* DSO decreased by 6 Days to 54 Days.

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