Happiest Minds Technologies Limited (HAPPSTMNDS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '23 Earnings Conference Call of Happiest Minds Technologies Limited, hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manik Taneja. Thank you. Over to you, sir.

Thank you, Shasi. Good morning, everyone. Thank you for joining us today on the Q2 FY '23 earnings call of Happiest Minds Technologies Limited. On behalf of JM Financial Institutional Securities, I would like to thank the management of Happiest Minds for giving us the opportunity to host this earnings call. Today, we have with us Mr. Ashok Soota, Executive Chairman; Mr. Joseph Anantharaju, Executive Vice Chairman and CEO of Production Engineering Services; Mr. Venkatraman Narayanan, MD and CFO; Mr. Rajiv Shah, President and Senior Digital Business Services; Mr. Ram Mohan, President and CEO, Infrastructure Management and Security services; Mr. Aurobinda Nanda, President, Operations and Deputy CEO, Product Engineering Services; Mr. Sridhar Mantha, Chief Technology Officer; Mr. Sunil Gujjar, Head of Investor Relations; Mr. Praveen Darshankar, Company Secretary and Head of Legal. I will hand over the call to Sunil for safe harbor statement and to take the proceedings forward. Thank you. Over to Mr. Sunil.

Thank you, Manik. A very good morning to all. Welcome to this conference call to discuss the financial results for the second quarter ended September 30, 2022. We trust all of you are keeping well and staying safe. I'm Sunil, Head of Investor Relations. Earlier reviewed the financial statements, quarterly fact sheet and press release are available on our website. The agenda for this call is as follows: Ashok will begin the call by sharing his perspectives on the business environment and our results; Venkat and Joseph will then speak about our financial performance and operational highlights. After which, we will have the floor open for Q&A. Before I hand over, let me begin with the safe harbor statement. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry a risk in terms of uncertainty because of which the actual results could be different. We do not undertake to update those statements periodically. Now let me pass it on to Ashok.

Thank you, Manik and Sunil. Good morning to all of you, and excuse me for my voice at the moment. I am proud and happy to share that in all parameters of revenue growth, EBITDA and others that Happiest Minds continues to be #1 or #2 amongst all listed companies, who have so far declared results. Our EBITDA margin is behind only 1 company in the top 10 IT services companies. Moreover, for 10 quarters in a row we have delivered more than 25% EBITDA, indicating the consistency of our earnings and the strength of our value proposition. During this quarter, we completed 2 years of being a listed company. I would like to express my gratitude to all the stakeholders for their continued trust and confidence placed in us. We won the prestigious Golden Peacock Award for Excellence in Corporate Governance for the year 2022 within 2 years of our IPO. This is a validation from the institution of directors of our efforts over the years to build an institution for our stakeholders with a very strong foundation. To address the growing needs of our customers and in line with our strategic expansion plans, we have increased our capacity across our delivery centers. This includes purchase of an additional facility in Bangalore, expanding our center at Noida and our Bhubaneswar center is expected to be operational by end of November. In U.S., we have 2 new offices in New Jersey and Seattle. This unprecedented expansion of our delivery capacity is an indication of our confidence in sustaining future growth, in line with our [indiscernible]. The demand environment continues to be strong, and we will continue to focus on initiatives that further [indiscernible] to our already strong organic presence. I'd like to give all of you best wishes for Dipawali. And I will now hand over to Venkat, who will give you all the numbers to support my above statement. Thank you.

Thanks, Ashok. Good morning to you all on the call. Happy to be presenting a good set of numbers for our second quarter of FY '23. It's been a good quarter and a good half year from all fronts. In dollar terms, our revenues were at about $44.3 million, showing a sequential growth of 5% and a year-over-year growth of 23.8%. Let's say, 24%. However, growth in constant currency...

Sir, your volume is low.

You go ahead, Venkat. Your volume was fine actually.

Our growth in constant currency was 5.7% on a sequential basis and about 26.5% on a Y-o-Y terms. With this quarter, we've had 9 successive quarters of 5% plus growth in dollar terms. Coming to rupees. In rupees, our total revenues for the quarter were about INR 359 crores, showing a sequential growth of 9.8% and year-over-year growth of 23.9% or 24%. Our EBITDA for the quarter was INR 94 crores, which is 26.3% of total revenues. And as Ashok referred, we are in the top -- one of the top listed IT services companies with respect to this number and the growth parameters that I talked about. Volume growth, operating leverage in term of better utilization, rate increase, increase in other income and a favorable exchange rate helped us set off a large part of the pay increase that came in this quarter, while helping maintaining our profitability levels, hence deliver the above margins. With this quarter, we have had 10 successful quarters of EBITDA, which is 25% plus. So that's an interesting metric that we'll be putting forward. When coming to PBT and PAT, we ended the quarter with profit before tax of about INR 81 crores, which is about 22.5% of revenues compared to INR 76 crores and 22.9% of revenues in the previous quarter. Profit after tax was 16.8% and about INR 61 crores compared to the 17.1% and INR 56 crores in the previous quarter. EPS was at INR 4.17, showing a sequential growth of 7.5% and a Y-o-Y growth of 36.3%. Our effective tax rate has remained almost at a steady 25.5% over the quarters. A few highlights of our performance for the first half of the year are: Dollar revenues stand at about $86.5 million, showing a growth of 25.5% on a year-over-year basis. Total income in rupees was about INR 684 crores versus INR 509 crores for the previous half year, showing a growth of 34.4%. EBITDA was INR 182 crores versus INR 116 crores, showing a growth of 33.5%. So you can see good growth in revenues, total income and consequently, EBITDA. Our performance in the first half of FY '23 has shown significant growth in revenues and profits and is in line with the annual guidance of 25% plus that we had stated earlier. Some of the operational highlights on our performance for the quarter are, while supply side constraints remain, our attrition numbers have started slowly trending down. And on an LTM basis, it is -- it stands at about 23.5% compared to the 24.4% in the previous quarter. Our attempt to keep those numbers in check and printing downwards is what we will be focusing on -- continuously focused on as we move forward. Utilization levels continue to be high and was at 80.6% compared to 79.1% in the prior quarter. Like we have mentioned earlier, we would like to ideally keep this in the range of 78% plus, but however, as you know, supply and demand situation has warranted us to have this utilization run at the high levels of 80% plus. We have added 393 Happiest Minds during the quarter on a net basis. This number had a decent number of campus hires, which is about 240, who joined us this year -- this quarter. Our diversity metric was at 27.6% of women Happiest Minds compared to the 26% in the previous quarter. As you know, this is a number that we focus on, and it finds its way in our vision statement as well. Revenue share of verticals has shown increase in almost all the verticals, except for a slight drop in retail and industrial. And the primary reason for this has been completion of projects with a couple of large customers that we have been dealing with. Repeat business continues to be 91% of our revenues, and this stands testimony for the land and expand strategy that we have been following with our customers. We ended the quarter with about $40 million customers and count amongst them about [ $54 billion ] corporations who have revenues of more than $1 billion. That means we have got $40 million customers and a total of 220-plus customers and out of which about 54 corporations have revenues of more than $1 billion and essentially large corporations. We continue to generate healthy cash flows. And for the quarter, free cash flow was about INR 86 crores, which is about 90% of our reported EBITDA. As mentioned on the call last quarter, we have deployed about INR 128 crores in the purchase of office space in Bangalore, funded primarily through long-term fixed rate debt of INR 120 crores. Looking at the interest rates today, the fixed rate of 4.2% on the loan makes the deal very sweet. We have significant other operating leverages coming out of the transaction, and I had covered this in a little bit of detail on the last call. And it also lends itself as a natural hedge to us. The impact of this loan and this purchase is positive from a P&L standpoint on a cash flow impact standpoint versus a rental or arrangement that we would have ideally had for this building. Cash and cash equivalents at the end of the quarter stood at INR 670 crores and our capital return ratios continues to be very healthy. Return on capital employed at the half year stands at 35.4% and return on equity stands at about 31.6% to 32%. Happy to say that keeping in line with our progressive dividend policy and capital allocation discussions, the Board of Directors of the company have declared an interim dividend of 2 per equity share with a record date of November 3, 2022. Cash outflow on discount will be about INR 29 crores. Finally, as you may have read in the press, the Board of Directors of the company at its meeting held on October 5, 2022, has approved and enabling resolution to raise capital of amounts not exceeding INR 1,400 crores. We have now reached out to our shareholders for their consent and the postal ballot process is in progress. Post shareholders' approval, the Board and the designated committee of the Board and -- our designated committee of the Board will decide the next course. The main use of funds will be to fund our inorganic growth aspirations of the company. Ashok did briefly touch upon the Golden Peacock Award that we were awarded this quarter, extremely proud to say that we have been able to win this at such a young stage of growth of our company. With this, I conclude my commentary, wishing all of the participants on the call a very happy Diwali and Dhanteras. I'll now turn it over to Joseph for his comments.

Thank you, Venkat. A very good morning to all. We continue our march with a strong set of numbers, which reflect our ability to grow profitably and at state. Growth cut across business units, centers of excellence, geos and verticals, reflecting the relevance of our services to our customers. We are executing gold programs for our customers in their journey to drive growth, cost optimization or both and to build a resilient enterprise. Our proven land and expand strategy is helping us make deep inroads into our customers' digital journey by increasing our wallet share, which is validated by our average revenue per customer, consistently trending up. In the reported quarter, it is at $812,000 compared to $783,000 a year ago. Our 3 business units, Product Engineering Service, Digital Business Services and Infrastructure and Security Services between them serve 226 customers, out of which $55 billion enterprises, with 40 customers contributing more than $1 million in revenue. Through an efficient sales organization and sound account management practices, we're able to seamlessly take our offerings across these 3 business units, resulting in 42% of revenues being cross deals. Enterprises are running compressed transformational initiatives leveraging the power of digital. For a U.S.-based food retailer, we have been chosen as a strategic partner in their journey to drive e-commerce initiatives. Our customers are deploying outstanding customer experiences across various touch points to increase customer confidence, happiness, brand loyalty and advocacy. For example, a Europe-based mature startup in the real estate tech has chosen us to enhance their digital platform to map their entire customer journey from sales to aftermarket. Cybersecurity continues to be more important than ever. Through our integrated security capabilities from identity to threat intelligence to manage security services, we're helping our customers intelligently assess, manage, detect and respond to cyber risk. For example, a leading fashion clothing and accessories brand in the AMC region chose us to assess their cybersecurity risk, identify threats and thefts and implement remedial measures. Our best and depth of capabilities help us to drive value across customers' business lines. For example, using intelligent automation and superior data visualization techniques, we're able to help a U.S.-based global energy company drive efficiency and take timely decisions across their strategy clients of business. This still most often than not is a force multiplier for enterprise and in fact, full proof of concept engagement done for a business unit, can soon open doors for much larger engagement within the customer's ecosystem. For example, this FMCG major chose us to implement Microsoft Power Automate platform in South East Asian territory to automate the order entry and purchase acquisition processes based on our success in other reasons with the same customer. Our compelling people engagement program and the vibrant carrier paths that we provide offers a value proposition that has [indiscernible] During the quarter, we welcomed 393 new Happiest Minds which includes 247 campus graduates. Great Place to Work institute has yet again recognized us in the top 50 best workplace for women, and we are ranked [indiscernible] among best workplaces in Asia. We have grown to for 4,500-plus smart and innovative Happiest Minds, who are adding tremendous value to our clients for their strategic initiatives. We're also continuously evaluating acquisition opportunities to fill gaps in our offerings, strengthen our focus in the markets we operate and position us on the leading edge of technology. Coming to the macro, technology permeases every part of our customers' business. They are accelerating growth and transformation agenda while continuing to build a strong digital core to drive agility, efficiency and resilience. So in spite of a longer than usual inflationary period and extended geopolitical conflicts causing a little bit of anxiety, demand remains strong and as of today, has not resulted in any major curtailment of spend, not any postponement of projects. Our strategy will be to keep a close watch on the market to anticipate our customers' needs in advance, enhance any needed technical and domain capabilities and be our customers' partner from strategy to execution, to solve their business problems and seize market opportunities while remaining laser focused on quality delivery. With this, I conclude my commentary, best wishes to all for happy Dipawali. Operator, we can open the floor for Q&A.

[Operator Instructions] We have a first question from the line of Karan Danthi from Jetha Global.

Could you explain what proportion of projects are related to cost takeout or optimization? Because that seems to be where incremental projects are coming from based on what your peers are saying. I just want to understand what that proportion is. And then I guess the second question would be if you think about your customer base and the exposures you have and how you're growing certainly, there's some customers, i.e., start-ups, which again see some headwinds, some enterprises in Europe as well, maybe. And then there are other customers where digital spending will last thing they cut. So if you could just frame a little bit of, I guess, the puts and takes across your customer base, that would be helpful.

So we really don't -- we've not been tracking our revenues across cost takeout and growth and other areas because for several of our customers, some of these initiatives are actually contiguous especially if you look at the midsized customers. And so we're not being differentiating or tracking this. But in terms of start-ups and Europe enterprise, our exposure to start-ups is on the lower side. And probably would be in the single digit as a percentage. So the impact has not been much. In the Product Engineering Service space, most of the customers that we work with are either midsized product and platform companies or some of -- most of them are larger product companies, which has been a strategic choice that we've made because the spend with these customers is much larger. We do have a few start-ups that we work with and the impact out there has been minimal. In terms of Europe, we -- we get around 10%. This quarter, it was 9.5% of revenues from Europe. We've seen a little bit of a lengthened sales cycle out there. But given that our exposure to Europe is in the single digits, again, we've not really had much of an impact. Rajiv, do you want to add anything, Rajiv?

Yes, a couple of things. Karan, if you look at what we serve our customers is driving digital transformation in the entire ecosystem, which into product build to integrate, to run digital-ready applications. So it's really thinking about utilization of new technologies, adoption of new technologies, disruptive technologies for really help them drive the change in their business model as well as their approach to the customer. So that I think that's first part of the questions. But when you look at some of the newer investments we have made in the areas of low-code environment, which looks at how we help you reduce your not only get your platforms out in the market faster, but in the long run, reduce your support and maintenance cost as well. So it's not really a cost takeout, but it's a cost optimization activities that we get involved in by implementing new sets of technologies and new sets of disruptive digital-ready platforms in their environment. Specific to Europe, I think that there were large accounts continued to grow, and we continue to see the momentum. But at the same time, the sales cycle are a little bit longer and continues to be a cautiously optimistic market for the entire IT services industry.

That's very helpful. Maybe just a quick sub follow-up on the low-code, no-code. Is that -- are you building proprietary platform? Do you simply sort of -- kind of actually on others -- for other companies for low-code.

So I think that there are -- so we have set a percent of expertise for a low-code environment as part of our digital process automation initiative. And within that, we tend to use a set of technologies, whether it's Microsoft platforms, our systems, et cetera, but the approach we have taken is -- how can we get the current environment that we have or current initiatives that we have, re-look at in helping them build get those platforms out in the market earlier than what they had planned for, helped in reduce their support and maintenance cost. So yes, we do have set of technologies that we work with, at the same time, it is a change management and consultative engagement that we go through truly identify the opportunities because some of the applications will not be ready for local kind of an environment.

Does that answer your question, sir?

Yes. Yes. I can go back in the queue and ask a follow-up.

[Operator Instructions] We have our next question from the line of Manik Taneja from JM Financial.

Just wanted to pick up Ashok's thoughts on the fact that right now, everybody is worried about the macro volatility. And given the experience of what we've seen in 2008, '09, do you think a company of our size and the fact that we have spread ourselves across multiple verticals as well as multiple segments. So players like us eventually may be at a disadvantage if customers look at vendor consolidation excises? And the second question was with regards to our longer-term aspiration of getting to $1 billion in revenues how much of PAT essentially bakes in organic component given the recent development on fund raising outside capital?

So I'll take the first part, and I'll ask Venkat to chime in on the second part of your question, Manik. The fact that we are operating in multiple verticals in a way acts as a risk mitigation and diversification. And again, if you notice, we've not gotten to every vertical. We prioritize some verticals within the ones that we are currently focusing on and reporting where we built much deeper capability and expertise. Now going to the risk from consolidation with most -- if not all of our customers, we are an integral part of their digital transformation journey. And with many of them, we start off working in a very early phase of their digital journey, helping them with some of their proof of concepts, validations, figuring out the right kind of technology stack. And therefore, we are an integral part to understand what they're trying to achieve. And therefore, the risk from a consolidation exercise carried out is much lower, given that we are critical to their journey. Venkat, do you want to take the second part of the question?

Yes. So Manik, if you recollect, we have talked about the 20% organic growth for the medium term and then maybe 15% after that in the previous quarters. And then the last quarter, we then decided to merge both organic and inorganic and said that we will -- we want to grow 25% for the next x number of years so that we can touch that $1 billion number. So the difference between the 20%, 15% organic growth and the 25% consolidated growth over the next x number of years by 2031 to reach the $1 billion number has to come in through acquisitions. And if my numbers are right, if we had done about 20%, followed by 15% for the next 3 or 4 years, we would have touched a number of something like $750 million, $780 million by 2031. So effectively, as part of our -- if we had to make that aspirational number of $1 billion, we would have had to add about $250 million in the last year of the 10-year horizon or the 10-year period that we are talking about through inorganic means, which means, we have to acquire 1 or 2 companies or maybe even more or it could be good bolt-ons, which will add to that number over this period from today to 2031. Does that answer your question, Manik?

Can I just add a little bit also, Venkat, has given quite a lot of information. I think, Manik, as you know, an acquisition is a lumpy process in the sense it will add a solid amount of revenue. It may happen in 1 year. It may not happen in the next. Though we've increased our guidance to 25%, practice that all of the current year's growth is really organic. So I don't think that we can make that artificial distinction. There will be a fair share of acquisition, and there will be continued strong organic muscle growth. So basically, that's the way we are working. And in that way, we will certainly keep in mind our vision, which we expect to achieve.

Sure. And if I can call you a little bit on that acquisition pursuit, if you could help us understand what are the kind of targets that you're looking at? What are the typical revenue or margin trajectory for the acquired -- for the targets that you're looking at? And then subsequently, I have a couple of follow-up questions related to the operating performance of the quarter.

Venkat, I guess, on this question, we really can't make any forward-looking statements, but you can address it please?

Right. The first question, we are looking at pure digital assets, which will be in areas of -- just to identify a few areas like in SFDC, Salesforce, areas of security, certain key verticals into which we would like to grow further and maybe there are horizontal technologies, which will serve to certain key verticals, like Pimcore was for us when we did that acquisition a couple of years back. So that's the area that we are looking at, and it will be pure play digital capabilities, digital assets because we don't want to dilute our positioning, which is about 97%, 98% digital business that we are doing today. That's on the identification of the target. As far as -- there is 1 more angle to it geography. We are looking at companies, U.S., Europe, India. India, if there is capabilities on the deliveries on U.S. companies with India or, let's say, offshore delivery capabilities, it could be in India, it could be in Philippines or it could be in another area from the offshore delivery capabilities are typically built. Same thing goes for the U.K. We are not looking at pure play 100% in on-site companies as of now, but I think that has something like Ashok mentioned as we progress, we could look at it in course. So that's on the landscape of targets that we are looking at. We are working very closely with sell-side bankers, buy-side bankers on this internally, and we've also appointed bankers for that purpose. So that's something on the acquisition front. With regard to the profitability, we have been delivering 26% profits EBITDA numbers. So when we look at acquisitions, we'll be mindful of the fact that we do not want to dilute that too much. Obviously, you have -- there are puts and takes on that. If it adds capabilities, you are willing to and there is a huge growth possibility, you have to factor that. So it's not that we are stuck to the 26% number, but we do not want to also take a loss-making company or something where we need to turn around the operations and the like from there. Thus, we're looking for capabilities of strategic imperatives when we do the acquisition, and that's what will drive us forward when we look at companies.

[Operator Instructions] We have a question from Karan Danthi from Jetha Global.

Yes. So I'd love to understand why you win business. It'd be really helpful to understand what is the reason you win digital business vis-a-vis your peers? Is it specific competencies, which are hard to recreate elsewhere? I would just love to understand what are these dynamics that justify why you, I guess, in a sense, as a pure play versus being as part of a large organization?

So Karan, in different scenarios, there are different reasons, but some of the reasons why we went business from our customer. And one of the strategies that has really worked well for, the land and expand strategy. And as I mentioned -- as alluded in my previous response, with many of our customers, we get involved in the early stages of your digital journey, and it sure that some of our strengths really play out well. The focus that we have on the digital space and the depth that we have in digital technologies allows us to help our customers to bridge the gap between their business, objectives and the technology landscape. And being a little smaller company and being a bond digital bond agile company, we're able to be very nimble in how the -- how we work with them and adapt to their compulsion. And once we've established ourselves as a partner of choice and they take these initiatives into implementation phase, we become the partner that they go along with. So depth in digital technologies, the agility, the quality of our people both in terms of the technical capabilities and their attitude as borne out by in the Happiest people -- Happiest customers mission and of late, the domain capabilities that we've been building up and the consulting approach that we take to our customers is what has allowed us to compete in the marketplace and win business.

Yes. Adding to that, Joseph, just I want to give a couple of other points. Our focus in terms of agile, infrastructure are in terms of multi-cloud adaptations or multi-cloud management and migrations and full circle security, right? And these are some of the areas which we specialize, apart from analytics or digital process automation. And those also puts us a little bit given the specialized service provider capability.

To say a couple of things as well. This is Rajiv. So I think that one area that makes us unique is our ability to invest ahead of the forecast, as all of us appreciate the technology disruptions are taking place at a much faster pace. So how much in ahead of forecast that we have continued to invest to really help our customers take advantage. So like blockchain or drones or even a low-code environment, et cetera, we continue to invest quite aggressively before the real need is identified. This is one. The second one, I think, is really we continue to carry a high Net Promoter Scores customer satisfaction. So a lot of our business comes from repeat set of customers, 92% -- more than 92% of our business repeat customer. And the third aspect is customer referenceability. We continue to get good references from our existing customers or customers have moved to a new location or a new company, they continue to attract us as well. So continue to deliver good stuff, continue to look at the investments ahead of the forecast and maintain the set of customer relationships, which help us well.