Update on the Indian Equity Market:
On Wednesday, Nifty closed lower at 17,246 (-0.4%)in the highly volatile session. METAL (+1.2%), OIL AND GAS (+0.4%) and PHARMA (+0.4%) were the top sectoral gainers.AUTO (-1.0%), FINANCIAL SERVICES (-0.9%) and BANK (-0.6%) were top losing sectors.
The top losers were KOTAKBANK (-2.6%), HDFC (-2.4%), and BRITANNIA (-2.1%) while DIVISLAB (+2.5%), HINDALCO (+2.5%) and TATASTEEL (+2.0%) were the top gainers.
Edited Excerpts of an interview with Joseph Anantharaju, Executive VC& Chief Executive Officer-Product Engineering Services, and Venkatraman Narayanan, MD and CFO, Happiest Minds with CNBC-TV18 on 22nd March, 2022:
- The IT industry is facing two concerns i.e. higher attrition and margin pressure. On margins, the MD commented that the company has been outperforming its guidance of 22-24%(EBITDAM) for the last four quarters. This is largely on account of Work From Home (WFH)scenario and other cost saving factors.
- For FY23E,the MD stated that demand seems to be robust and the company would be working on maintaining the EBITDA Margins at 24-25%. The pressure would be from wage hikes to retain the talent as the attrition rates are high. The new recruitment would cost higher. This increase in cost is expected to be compensated through rate increases to the customers. The favourable exchange rate is also helping to maintain the margins.
- MD’s Comment on the Russia-Ukraine conflict: There is flow of work continuing to India. Earlier it was because of entire digitalization move, which was applying pressure on supply side. Now he expects this conflict to add to this pressure. According to him, demand would not be an issue, but meeting the demand and requirements of the customers and attracting talent would be a challenge.
- The bill rates of services rendered from Eastern Europe are higher than services rendered from India. There is a headroom to cover for the increased cost by negotiating for higher rates without impacting the quality of deliverables. This is the upside for the Indian Tech Industry.
- On the company’s organic revenue growth guidance of 20%, the MD clarified that it is for a period of time spanning five years. He expects the revenue growth range to be around 32% YoY for FY22E.
- On high attrition rate problem, VC commented that the company expects the number to trend down a bit. It has taken a few measures, upcoming high increments and increased level of engagement, learning and development training to attract people is expected to maintain or reduce the current attrition levels. With current campus batch coming in and supply increasing,the company expects the attrition rates to taper down and to release some pressure on margins going forward.
- The contribution of BFSI segment have been reducing in past couple of quarters. BFSI sector for the company have not been a traditional segment. Consulting, leasing and payroll service providers are the type of clients of the company. BFSI sector have been highly penetrated by the earlier entrants and large IT companies. Happiest Minds have been entering BFSI sector in adjacent areas rather than the traditional/old ones.
- The marginal drop in BFSI segment is because of the recalibrations and reallocation in the verticals. Edutech is growing faster than BFSI in last two quarters. The recent merger and acquisition has lead to faster growth in Consumer Packaged Goods (COG) segment.
- There is openness from existing and new customers with regards to considering the rate adjustments due to inflation and wage increases.
Asset Multiplier Comments
- We think the strong deal momentum across verticals, emphasis on digital business and client centric approach may help the company to achieve its medium-term guidance of 20%+ revenue growth.
- The ongoing talent crunch may keep margins under check in the near term, but the initiatives taken by the company may help to maintain the EBITDA Margins stable at 24-25%.
Consensus Estimate (Source: market screener website)
- The closing price of Happiest Minds was ₹ 1,145/- as of 23-March-2022. It traded at 76x/ 68x the consensus earnings per share estimate of ₹15/ 17 for FY23E/FY24E respectively.
- The consensus target price of ₹ 1,510/- implies a PE Multiple of 89x on FY24E EPS estimate of ₹ 17/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”