HDFC Securities says that Happiest Minds derived 96.6% of its Q3FY21 revenues from digital technologies, with strengths in cloud and Enterprise SaaS (Software-as-a-Service) space. Segment-wise, Product Engineering Services (PES) contribute 50% of revenue, followed by Digital Business Services (DBS) 24.5%, Infrastructure Management & Security Services (IIMS) 21.5% and the residual is attributed to Others. 
Happiest Minds has strengthened its relationships with independent software vendors (ISVs) like Amazon and Microsoft in the past 3- 4 years. It has also established a ground connect with their technical account managers for prospective customers.

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HDFC Securities highlights that digital technology has become an important aspect for businesses and clients are looking to use emerging technologies such as cloud, analytics, and automation to expand product offerings, enhance productivity, and provide better customer experience. While most customers were already on the path of digital transformation pre-pandemic, the pace of adoption then was slow, but it has now picked up due to COVID.

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HDFC Securities expect a good potential for Happiest Minds to improve its average revenue per client metric over the next 3-5 years, led by focus on client mining, and offerings in the digital and infra service segments, and investing in domain expertise like BFSI, Retail and Manufacturing by hiring business analysts, domain experts, etc.

Valuation and Recommendation:

Happiest Minds has a diversified mix of services, multiple long standing client relationships spread across verticals, and healthy cash on the balance sheet. HDFC Securities expects it to pursue inorganic acquisitions (in digital e-commerce and data management solutions) and expect the company’s revenue to grow well in the long term. Further, a visible and consistent growth in the digital business has resulted in stable and consistent growth in the past fiscal coupled with its legacy business performance, says HDFC Securities.

Historically, Happiest Minds has acquired three companies until date; while OSSCube and Cupola Technologies were relatively small in size, the recent acquisition of PGS could potentially add 10% revenue growth in FY22F. HDFC Securities expect more M&A activity in the coming quarters. Happiest Minds deserves a premium because it could grow faster than its midcap peers and maintain margins. Since the company claims that 97% of its revenue comes from digital services, we assume higher growth rates. HDFC Securities believes that the base case fair value of the stock is Rs 671 and the bull case fair value of the stock is Rs 722 for the next two quarters. Investors can buy the stock on dips to Rs 604-608 band and add further on dips in the Rs 560-564 band.