Actively looking for acquisitions – Happiest Minds

Update on the Indian Equity Market:

On Monday, Nifty closed in the green at 15,315. Among the sectoral indices, Bank (+3.3%), Private Bank (+3.3%), and Financial Services (+2.9%) closed higher. Metal (-0.5%), IT (-0.4%) and Pharma (-0.3%) closed in the red. Axis Bank (+6.2%), ICICI Bank (+4.2%), and SBI (+4.0%) closed on a positive note. SBI Life (-2.3%), HDFC Life (-2.1%), and DR Reddy (-1.8%) were among the top losers.

Excerpts from an interview of Mr. Joseph Anantharaju, Executive Vice Chairman & CEO of Product Engineering Services, and Venkatraman Narayanan, MD and CFO, Happiest Minds with CNBC-TV18 dated 12^th February 2021:

• The company guided for a 20% revenue growth rate. The demand has panned out well.
• The company won 6 new deal wins in 3QFY21.
• Speaking about verticals, Mr. Joseph said edutech was doing well. The company received new requests and projects.
• The industrial, B2B, and logistical space seem to be having new initiatives, which are leading to higher demand.
• On operating margins, he said for the last 3 quarters the company is delivering margins in the range of 21-23%.
• The company has guided for a profit margin of 22%-24% in FY22E.
• On revenue growth, the company will maintain long term growth at 20%.
• The company witnessed some efficiencies in the past 3 quarters, the plan is to retain some of those going forward.
• The company recently completed an acquisition of PGS for 8.25 mn$. The company is actively looking for acquisitions.
• On dividend, the company has not yet declared but the board will look after it.

Asset Multiplier comments:

• The improvement in new deals signed and increased focus on IT budgets by clients has been mentioned by most of the IT Companies during the December quarter earnings call.
• In 3QFY21, most of the IT companies have significantly expanded their operating margins, which was a result of continuing control on costs and improved sales.
• It would be interesting to watch the performance of IT companies in the next couple of quarters, as companies have guided for lower margins but if cost control continues (led by on-off shore mix, WFH) then the margins might sustain these high levels.

Consensus Estimate: (Source: TIKR website)

• The closing price of Happiest Minds was ₹ 401 as of 15-February-2021.  It traded at 36x/35.8x the consensus Earnings per share estimate of ₹ 11/11.2 for FY21E/FY22E/ respectively.
• The consensus average target price is ₹ 385/- which implies a PE multiple of 34x on FY22E EPS of 11.2/-.

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