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Strong performance despite uncertainties

Happiest Minds Technologies Ltd (HMTL) is an information technology company that provides digital transformation and technology services to consumers in the automotive, banking, financial services and insurance, consumer packaged goods, e-commerce, edutech, engineering R&D, hi-tech, manufacturing, retail, and travel/transportation/hospitality areas

• In Q1FY24, revenue rose 22.6% YoY, led by robust growth in the Digital Business Services (DBS) and Product Engineering Services (PES) segments.

• EBITDA margin, however, dipped to 25.5%, compared with 26.6% in Q1FY23, due to increased employee-related expenses.

• HMTL shows sustained topline growth. With the continued deal momentum, growing demand for digital solutions and its expanding reach, the company is well-positioned to capture future growth opportunities. However, we believe upcoming growth prospects are priced in. Hence, we downgrade to SELL rating, with a target price of Rs. 800 based on 34x FY25E adjusted EPS.

Organic growth backs revenue performance

HMTL’s revenue grew a robust 22.6% YoY in Q1FY24 to Rs. 405cr, backed by a 12.8% YoY increase in DBS to Rs. 112cr and 30.8% in PES to Rs. 204cr. Within the industry, revenue growth was led by the edutech and BFSI sectors, which contributed 24.1% and 11.0%, respectively. Importantly, the company’s recurring business remained broadly stable, at 87% of total revenue, compared with 90% in Q1FY23, demonstrating a strong relationship with clients. Additionally, the company aims to reach $1bn revenue by FY31, fueled by further acquisitions and deal wins. During the quarter, the EBITDA margin declined to 25.5%, compared with 26.6% in Q1FY23, due to an increase in onsite employee mix and onboarding of new employees. The management has maintained guidance for the FY24 EBITDA margin in a range of 22% to 24%

Key concall highlights

• In Q1FY24, HMTL's employee count exceeded 5000, with net addition of 130 new employees. The company also saw a downward trend in the attrition rate to 16.6% from 19.8% in Q4FY23.

• It has successfully raised Rs.500cr through qualified institutional placement, which will be used to fulfil working capital needs and fund growth opportunities

Robust deal pipeline

The company secured numerous deals across geographies such as the Middle East and Australia. Although there has been a delay in signing contracts, there were no cancellations. Additionally, HMTL added 18 new logos during the quarter, with two new logos generating $1bn in revenue and taking the total count to 57.

Valuation

The company continues to thrive in a strong long-term demand environment, led by impressive deal wins and a healthy deal pipeline. Margins in FY24 could suffer from a wage hike in Q2FY24, which, however, will be offset by decreasing attrition rates and are expected to remain at the higher end of its guidance. However, we believe that future growth prospects are already reflected in the current price and valuation looks expensive at current levels. Hence, we downgrade to SELL rating, with a target price of Rs. 800 based on 34x FY25E adjusted EPS

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