Generative AI And Acquisitions Will Strengthen BFSI And Healthcare Services

Key Takeaways

• The creation of a generative AI unit and strategic acquisitions target BFSI and healthcare for significant revenue and margin growth.
  
• Verticalization and sales team investment aim to enhance market penetration, operational efficiency, and earnings growth.
  
• High investments in generative AI and sales expansions may strain margins, while sector-specific economic conditions and attrition could disrupt revenue growth.

Catalysts

Provides IT solutions and services in India, the United States, Canada, the United Kingdom, Australia, the Netherlands, Singapore, Malaysia, New Zealand, Mexico, Africa, and the Middle East.

• Happiest Minds is experiencing strong deal momentum and has launched transformational initiatives, such as the generative AI business unit, which is expected to contribute significantly to revenue growth as enterprise-wide adoption increases in the coming fiscal year.
  
• The acquisitions of PureSoftware and Aureus are expected to enhance Happiest Minds' industry capabilities, particularly in banking, financial services, and insurance (BFSI) and healthcare, which should drive revenue growth and potentially improve net margins through synergies and expanded customer relationships.
  
• The company is focused on verticalization, which aligns sales and domain expertise within specific industry groups. This strategic focus is expected to improve service offerings and client relationships, potentially increasing revenue through better market penetration and account growth.
  
• Investment in a new Chief Growth Officer and the establishment of a dedicated sales team are set to drive net new account acquisitions and expand the customer base, which should lead to an increase in revenue and earnings growth over time.
  
• The utilization rate of employees is expected to increase, leading to better operational efficiency. Combined with a healthy demand environment, this efficiency gain could improve EBITDA margins and contribute positively to earnings growth.

Happiest Minds Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Happiest Minds Technologies's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 14.0% in 3 years time.
• Analysts expect earnings to reach ₹4.9 billion (and earnings per share of ₹31.0) by about March 2028, up from ₹2.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.1x on those 2028 earnings, down from 43.1x today. This future PE is greater than the current PE for the IN IT industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.1%, as per the Simply Wall St company report.

Happiest Minds Technologies Future Earnings Per Share Growth

Risks

• The generative AI business services are in a start-up and investment phase, with significant spending but not yet substantial revenue growth; this could impact short-term net margins and earnings.
  
• There has been a softness in the edu tech vertical due to changing student preferences and economic pressures, which could limit revenue growth from this segment.
  
• Attrition rates have ticked up slightly; sustaining a high attrition rate could disrupt operational efficiency and impact earnings by increasing recruitment and training costs.
  
• The company is making significant investments in expanding its sales team and verticalization, which could strain EBITDA and net margins if these efforts do not yield expected results.
  
• Exposure to economic conditions in specific sectors and regions, like the potential economic impact on the insurance segment due to strategic reviews, may pose risks to stable revenue growth.
  

Valuation

• The analysts have a consensus price target of ₹758.0 for Happiest Minds Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹856.0, and the most bearish reporting a price target of just ₹640.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹34.7 billion, earnings will come to ₹4.9 billion, and it would be trading on a PE ratio of 36.1x, assuming you use a discount rate of 15.1%.
  
• Given the current share price of ₹642.9, the analyst price target of ₹758.0 is 15.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.