Higher for longer
Happiest Minds (HAPPSTMN) is a high-growth, high-quality, high-valuation IT services company. It has a high potential to scale and its growth aspirations are within historical precedents; recent reorganisation can accelerate its growth ahead. HAPPSTMN’s high quality is reflected in its service portfolio, strong approval ratings, superior execution metrics, and stable senior leadership. The current scale of the business, the distinction in quality and the disproportionate impact for potential recovery in discretionary services in the sector will lead to ‘higher for longer’ growth and can keep valuation higher than peers. We initiate coverage on the company with an ADD recommendation and TP of INR 935, based on 38x FY26E.
▪ High potential for scalability: HAPPSTMN has progressed well in both mining its customers as well as adding large logos. The ask rate of market share gains for HAPPSTMN is plausible and well within the historical market share displacement for companies that have scaled 5x. The new organisational structure can leverage the multi-disciplinary strengths of the company and support its growth and transition to a vertical structure. The timeline of growth aspirations is at a historical average for IT companies that scaled a similar magnitude in the last 25 years.
▪ ‘High quality’ features: HAPPSTMN is a capability-focused organisation with strong practices, which is reflected in its superior approval ratings as well as a stable and tenured leadership team. It has augmented its capabilities with acquisitions to build a healthcare vertical and will continue to tap the inorganic route. In our mid-tier IT assessment framework, the company scores high on growth and execution. HAPPSTMN has strong partnerships with hyperscalers and high-growth platforms and is catching up with larger peers. It has the lowest cost of delivery as well as low dependence on subcontractors, which largely supports its superior margin profile. The company has a diversified vertical base, reduced client concentration risk, and lower exposure to BFSI volatility.
▪ High valuations can persist: We estimate HAPPSTMN will grow its revenue and EPS at 21% CAGR and 24% CAGR respectively over FY24-26E, which is in line with the mid-tier average. However, HAPPSTMN’s valuation is higher than peers average with PEG at 1.8x as compared to peers at 1.5x which is factoring in ‘higher for longer’ revenue growth (16% CAGR implied growth over FY23-38E). Faster recovery in discretionary spending in the sector and value accretive acquisition ahead can be positive triggers for the stock which currently trades at 42x and 34x FY25E and FY26E (valuation multiples are down >15% from 48x at the beginning of the year).