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Global financial services major Nomura has initiated coverage on Happiest Minds, with a buy rating and target price of 480. This implies a potential upside of about 15% from current levels. Happiest Minds shares were trading around 4% higher at 422 in noon trade today.

"We initiate coverage on Happiest Minds with a Buy rating and target price of 480, based on 32x FY23F EPS of 14.9. We expect Happiest Minds to record USD revenues CAGR of 25% over FY21-24F, but build in EPS CAGR lagging at 17% on EBIT margins falling to 18% by FY24F (vs 22% in FY21F) and the full impact of tax rate starting in FY22F," Nomura said in a report.

"While the recent run-up in the stock is likely to limit the upside in the near term (2.5x of the IPO price), we like Happiest Minds as we see it as a ‘consistent compounder’. Our 32x target multiple is 20% higher than the target multiple for INFO/TCS and 10% higher than 1-year forward average trading multiple of mid-cap IT services," it added.

Happiest Minds had debuted on stock markets in September with a bumper listing. The IT services company had posted a 97% rise in net profit from a year earlier in the fiscal third-quarter to 42.15 crore and said it has a robust order portfolio. Revenue at the Bengaluru-based software services firm grew 14.6% from a year earlier to 201.29 crore in the quarter ended December.

Here are highlights of what Nomura said in the report:

1) "We expect Happiest Minds to trade at a premium as: 1) we think it will continue to grow at 2x the pace of large-caps and 1.5x of mid-caps, led by the presence in Digital."

2) "Digital contributed 97% of FY20 revenues for Happiest Minds...ahead of the 40-50% range for Indian IT service peers. As per Gartner, Digital is likely to record~16%+ CAGR over the next five years as clients accelerate investments in core transformation to expand product offerings, enhance productivity and drive better customer experience. Within Digital, Happiest Minds has strengths in Cloud, SaaS and Security, which together contribute 75% of revenues as of FY20, led by its focus on partnerships with ISVs like Azure/AWS, Salesforce and McAfee. Everest rates Happiest Minds in the ‘Major Contender’ category in Security Services and in the ‘Aspirants’ category in IoT, Analytics and Product Engineering."

3) "Happiest Minds’ client and vertical concentration is similar to mid-cap IT service players like LTI/MTCL and has an active client base of 157 as of FY20. Average revenue/client at $615K is below $3-4mn at MTCL/LTI and we see potential to scale given: 1) exposure to 38 clients with $1bn+ revenues provides access to large IT budgets; 2) increased focus on account mining led by aligning sales incentives to cross-selling, focus on solution approach to clients’ problems; and 3) investing in domain and consulting expertise and onsite presence."

4) "Happiest Minds is led by its executive chairman, Ashok Soota, and a credible team with 1-2 decades of experience in IT services that has held leadership roles and P&L responsibility at larger peers like Wipro, Mindtree, EDS and MuSigma."

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