Hold Happiest Minds Technologies; target of Rs 929: ICICI Direct

ICICI Direct's research report on Happiest Minds Technologies

Happiestminds (HM) reported 3.6% QoQ USD, 3.5% QoQ CC, revenue growth, slightly lower than our estimate of 4% QoQ CC. On a YoY basis, growth was 12.7% YoY USD (7% organic). EBIT margin came in at 19.2% (-175bps QoQ), below our estimate of 21.1% due to higher employee costs attributable to slight increase in onsite employee mix and campus joinee related costs. Margins will likely be impacted in Q2FY24E by wage hike rollout from 1st Jul’23. Forward-looking demand indicators point towards healthy demand ahead: 1) strong headcount addition (2.7% QoQ and 21% YoY), and 2) strong deal pipeline. However, management mentioned that they may revise the guidance of 25% YoY CC growth for FY24 after Q2FY24 depending on potential M&A closures. EBITDA margin guidance has been retained at 22-24%.

Outlook

As a result, our FY24E / FY25E / FY26E EPS estimates change by +1.2% / -3.8% / -8.0% and our 12-month target price gets reduced to INR 929 (from prior INR 1,001) implying 1% potential upside. Hence we downgrade our rating from Add to HOLD, and see a balanced risk-reward for HM’s shares given that it is trading at 40x FY25E for FY23- FY26E EPS CAGR of 19% implying 2x PEG, higher than the average of 1.8x for our Indian IT sector coverage universe.

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