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Transformative Initiatives Sets Stage for Long-Term Success

Happiest Minds reported robust consolidated Q2FY25 revenues at $62.4mn, reflecting strong growth of 12.7% QoQ and 28.2% YoY in cc terms. In USD terms, reported revenue was up 12.3% QoQ and 27.0% YoY. INR revenue stood at INR5,216mn, up 12.1% QoQ and 27.9% YoY. During the quarter, the company reported a total of 281 active clients. Reported PAT for the quarter came in at INR495mn, down 15.3% YoY, whereas reported basic EPS stood at INR3.3. The cash conversion remains strong with a free cash flow of INR1,161mn translating into 97.7% of EBITDA.

* Happiest Minds Technologies have reported best growth results in Q2FY25, achieving its strongest performance in the past two years. The transformative initiatives the company launched at the start of the year are now gaining significant momentum, positioning the organization for sustained success. These initiatives include the acquisitions of Pure Software and Aureus, the establishment of the GenAI business unit (GBS). While these changes are expected to have a notable impact, the full benefits in terms of revenue and growth are expected to materialize over the coming quarters. The integration of Pure Software and Aureus teams is expected to generate synergies and boost overall performance. The company's positive outlook is supported by a stable operational environment, higher transaction volumes, and the full-quarter impact of the recent acquisitions. Management anticipates continued growth in H2FY25, driven by the expected closure of two major deals and the potential from several strategic initiatives, including cross-selling and up-selling opportunities from the acquisitions, the success of the Net New Sales team, and ongoing work in the GenAI space.

* Happiest Minds is actively pursuing new business opportunities, targeting large clients, including billion-dollar corporations. The company is optimistic about growth, driven by a strong U.S. economy, a favorable election outcome, and reduced interest rates, which are encouraging transformation initiatives for 2025. Key sectors for growth include BFSI and capital-intensive industries, with EdTech showing promise in professional education. The increasing demand for data analytics, AI, and GenAI to drive productivity improvements positions Happiest Minds to capitalize on these emerging trends for long-term success.

* Company delivered a healthy EBITDA margin of 21.7%, aligning with the guided range of 20% to 22%. Going forward, the company expects margin pressures in Q3 FY25 due to fewer working days and a planned pay raise for senior leadership. However, it anticipates offsetting these pressures and potentially achieving margin expansion in later quarters, driven by expected growth in volumetric sales and improved cost absorption.

Outlook and Valuation:

Happiest Minds shall fuel its long term growth aspirations through acquisitions, GenAI capabilities and investments in its sales engine. It is estimating a growth of 30-35% in FY25E. We have introduced FY27E and have revised our rating to HOLD and arrive at a target price of INR856 implying a P/E of 37x on Sep-FY27E EPS of INR23.1.

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