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Near term challenges impacted Q1 performance; Maintains 25% revenue growth guidance for FY24

Result Synopsis

Happiest Minds (HAPPSTMN) reported slight miss on financial performance for the quarter. Both, the sequential revenue growth and EBIT margin were below estimates. It reported constant currency growth of 3.5% QoQ(up 3.6% QoQ in USD terms, up 3.4% QoQ in INR terms), led by Edutech vertical (up 12.3% QoQ). There was sequential decline in EBIT margin(down 175 bps QoQ) led by higher cost of revenue. Employee attrition continues to decline as LTM attrition decreased by 320 bps QoQ to 16.6%. Digital accounts for 95.1% of revenue as of Q1FY24 vs 96.3% as of Q4FY23.

The long term demand environment remains robust led by rapid adoption of cloud and data analytics. However, the clients especially in select sectors remain cautious regarding the evolving macroeconomic situation and it has led to near term moderation in revenue growth. The deal pipeline remains strong and it supports revenue 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 23.2% over FY23?25E with average EBIT margin of 21.0%. We maintain our BUY rating on the stock with revised target price of Rs 1,125/share based on DCF methodology. The stock trades at PER of 48.7x/37.5x on FY24E/FY25E EPS.

Result Highlights

? Reported revenue of Rs 3,909mn (up 3.4% QoQ in INR terms, up 3.6% QoQ in USD terms). The cc growth was 3.5% QoQ. The growth was led by Edutech vertical (up 12.3% QoQ) and it launched new vertical; Healthcare vertical (~13% of revenue).

? Digital now accounts for 95.1% of revenue vs 96.3% as of Q4FY23.

? EBIT margin decreased by 175 bps QoQ to 19.2%, led by increase in Cost of Revenue (up 4.8% QoQ).

? Offshore revenue mix decreased by 90 bps QoQ to 83.9%. Total Active Customers increased by 6 QoQ to 243.

? Net employee addition stood at 131 employees during the quarter to close at 5,048 employees. LTM attrition declined by 320 bps QoQ to 16.6%. Employee utilization remained flat at 74.6% as of Q1FY24.

? DSO decreased by 4 Days to 58 Days.

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