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

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Happiest Minds Technologies Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumeet Jain from ICICI Securities. Thank you, and over to you, Mr. Jain.

Yes. Thank you, operator. Good morning, ladies and gentlemen. Thanks for joining us today on Q2 FY '24 Earnings Call of Happiest Minds Technologies Limited. On behalf of ICICI 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 from Happiest Minds, Mr. Ashok Soota, Executive Chairman; Mr. Joseph Anantharaju, Executive Vice Chairman and CEO, Product Engineering Services; Mr. Venkatraman Narayanan, Managing Director and CFO; Mr. Rajiv Shah, President and CEO of Digital Business Services; Mr. Ram Mohan, President and CEO Infra Management and Security Services; Mr. Aurobinda Nanda, President, Operations and Deputy CEO of Product Engineering Services; Mr. Sridhar Mantha, CTO; and Mr. Sunil Gujjar, Head of Investor Relations. With that, I will hand it over to Sunil for safe harbor statement and to take the proceeding forward. Thanks, and over to you, Sunil.

Thank you, Sumeet. Good morning to all participants in the call. Welcome to this conference call to discuss the financial results for the second quarter ended September 30, 2023. I'm Sunil, Head of Investor Relations. You can review our financial statements, quarterly fact sheet and press release, which are uploaded on our website. The agenda for this call is as follows: Ashok will begin the call by sharing his perspectives on the demand -- business environment and our results. Venkat, Joseph and Rajiv will speak about our financial performance and operational highlights, after which we'll 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 our actual results could be different. We do not undertake to update those statements periodically. Now let me pass it on to Ashok.

Thank you, Sunil. A very good morning to all the participants in the call. I'm happy to share with you that Happiest Minds has continued to deliver industry-leading performance, growing 3.6% sequentially in constant currency. On the revenue growth plus EBITDA, we were at 38.9% which is another quarter of superior performance. Our EBITDA margin at 24.5% has been well above our guidance range of 22% to 24%, and this is now for the 14th quarter in a row. We crossed two significant milestones during the quarter. We completed 12 years as a company, and we completed 3 years as a public entity. I would congratulate all the stakeholders who have contributed to and being a part of this journey. I'll express my gratitude for your continued support. During the quarter, we raised capital through QIP and I also sold a small portion of my equity at Happiest Minds. Both these events led to a small dilution of my equity interest. The latter was primarily done to fund the capital requirements of SKAN, the not-for-profit medical research entity that I started. And also to enhance the capital structure of Happiest Health. This capital infusion for these two entities should take care of their requirements -- their capital requirements for the medium term. As part of my commitment, I believe to have Happiest Minds exist in perpetuity, my controlling interest in Happiest Minds will not be allowed to go below 40%. I should also clarify that my current shareholding percent of 51.3% is safely well above this threshold. While many companies in our industry are seeing a decline in head count numbers, we, in the quarter, have added 237 Happiest Minds to our teams. In line with our commitment to work and execute on a larger vision to be a billion-dollar enterprise in sales by FY '31. In quarter 1, we had given a revenue growth guidance of 25% without making a distinction between organic and inorganic growth. Based on an assessment of the market dynamics, we are revising this growth guidance for the year to 12% on an organic basis. Additional growth, if any, due to acquisition will be over and above this guidance. We retain our EBITDA guidance of 22% to 24%. I am now happy to announce a major new organizational and strategic initiative for Happiest Minds. In order to avail of the transformational opportunity being presented to the entire industry, I would say, and to every industry through Generative AI. We are creating a new business unit called Generative AI Business Unit, which will be abbreviated as GBS. This will become a new engine of growth, and it will require a lot of collaboration because the sales will take place through the entire organization and through every industry group. Accordingly, we have selected Sridhar Mantha as the President and CEO of GBS. Sridhar is a Happiest Minds stalwart since inception and the best person to lead this in view of the interactions and collaborations that are required. Sridhar will be the a part -- the initiative will be led further by Rajiv Shah, as a member of the Executive Board. While we're doing this, we are also integrating our existing PES and DBS businesses into one combined business called PDES, and this will be under Joseph Anantharaju, who has led our most successful business unit up till now. There will be no change in IMSS. Therefore, we will retain our 3 BUs: PDES, IMSS and now the third one will become GBS. We believe these 3 engines of growth will take us forward to our future goals. I do want to emphasize again, though, that since it will take time to build up the whole organization in GBS, there will be no meaningful revenue until the beginning of the next financial year. And accordingly, we will only start reporting their numbers once the new year begins as a part of our plan that we will draw out. Let me conclude my commentary by wishing all on this call a very Happy Navaratri. And with this, over to you, Venkat.

Thank you, Ashok. A very good morning to all of you on the call. Wishing you and family a very happy Navaratri. In the next few minutes, I will take you all through the financial performance and certain key operational highlights for the quarter and the half year that ended September 30. So to start, amidst all that's happening in the world, I'm very grateful for the place we are in. Coming to the financials, very happy to share that our total income for the quarter for the first time has crossed the $50 million mark. Total income for the half year, at the same time, has crossed the $100 million mark. Now coming back to the quarter. Operating revenues at $49 million, grew sequentially by about 3.3% in dollar terms and about 10.8% year-over-year. While in constant currency, this growth was 3.6% and 11.6%, respectively. Clearly, our results demonstrates our ability to do what is right for our customers and stay relevant and agile to their needs. Total income for the quarter was INR 429 crores, showing a sequential growth of 6% and 19.3% year-over-year. EBITDA margin for the quarter stands at 24.4% compared to 25.5% in the previous quarter. The 100 bps impact was mainly due to wage hike that was rolled out to a major part of our group effective July 1 of this year. It's important to note that we continue to beat our margin guidance of 22% to 24% in spite the above industry pay increases, payments of variable pay and net additions in people, all areas where we have seen divergent approaches taken by other industry participants. After taking the increases, as said, our EBITDA for the quarter stands at INR 105 crores, showing a sequential and year-over-year growth of 1.8% and 11.1%, respectively. Profit before tax was INR 79 crores, 18.5% of revenues and showing a growth of 0.6% sequentially. The marginal decline of 1.2% on a year-over-year basis was primarily due to the amortization of intangibles that came about from the acquisition of SMI that we did in December of last year. We're taking a quarterly hit of about INR 7.5 crores undiscounted. Profit after tax was INR 58 crores, which is 13.6% of revenues. Now switching to our numbers for the half year. Like I said, our total income for the first half of the year crossed $100 million. Operating revenues grew 11.7% to USD 97 million, while in constant currency, the growth was 12.7% half year over half year. Total income stood at INR 833 crores, which is a growth of 21%. We continue to demonstrate good cash flow conversion with almost 98% of our EBITDA coming in as free cash flows. We ended the quarter with about INR 1,300 crores of cash and cash equivalents, which includes the INR 500 crores that we raised through QIP and the INR 135 crores that we raised through issue of NCDs. I am grateful to all market participants for their continued support for the company. Talking about a few operational highlights. At the end of the reported quarter, we are 5,285 Happiest Minds, a good addition of 237 over the previous quarter, which include joiners from campus. Our utilization has improved from 74.5% in the previous quarter to 76%. Attrition levels on a trailing 12-month basis have trended down nicely and now it's at about 14.4% compared to the 16.6% in the previous quarter and a significant reduction from the 23.5% we saw a year back. As expected, our return on capital employed has dropped to 23% from the 33% in the previous quarter, primarily on account of the capital raise that I talked about earlier. It will be our endeavor and -- our endeavor to improve this return ratio by deploying capital into growth revenue by the new BUs that we are creating, Ashok talked about them earlier and establishing -- and also through acquisitions. I request all of you to go through the investor deck on our website, which has much more details on operational highlights. Finally, in line with our progressive dividend policy, the Board of Directors of the company have recommended an interim dividend of INR 2.50 per equity share. The record date for this payout has been fixed as October 30. Cash outflows on this count will be about INR 38 crores. With this, I conclude my commentary, and over to you, Joseph.

Thanks, Venkat. A very good morning to all the participants in the call. We have yet again delivered industry-leading growth in the second quarter, which reflects the continued confidence of our customers in our value proposition. During the reported quarter, we acquired 7 new logos with many of them being large Fortune 500 enterprises. Our continued ability to open doors across these large high-tech companies, energy conglomerates and retailers emphasizes our value proposition. We continue to execute on our land and expand strategy as reflected by the consistent increase in the average revenue per customer, which is at USD 804,000 now. We were also able to increase the number of large customers as evidenced in an increase of our $10 million and $5 million customer cohort during the quarter. Now I would like to share a sense of the conversations we are having with some of our customers. I'm delighted to share that the leading global online retailer and hyperscaler chose Happiest Minds as the engineering partner to design interactive user interfaces and to provide automation services for the IoT platform based on our IoT, cloud, automation and product engineering DNA. With our mindful 4D framework, which is Explore, Envision, Engineer and Enhance, we have been assisting companies in their innovation and digital transformation journey. For a multibillion-dollar enterprise in the energy distribution sector, we leverage this framework to transform their document management systems for automated retention, intelligent search and faster retrieval, thereby improving customer experience. Our comprehensive and integrated suite of solutions are helping our customers secure their distributed IT environment 24/7. During the quarter, a leading warehouse club operator in the United States chose us to provide security assessment services on threat modeling and application security. Companies are reinventing every part of the enterprise using technology, data and AI to optimize operations and accelerate growth. For a large U.S. based utilities company, we have been chosen as a key partner to provide data engineering and governance services. We are working closely with alliance partners to deliver the benefits of digital technologies. And in one of a common customer, we are helping an industrial internet platform provider to build a data platform for their farm-to-table process using our deep IoT data and AI capabilities. Speaking a little bit about the demand environment, multiyear digital transformation initiatives are being broken down into shorter, composable engagements, that's what we've seen. This creates the right kind of opportunities for a company like Happiest Minds to exhibit agility, create value faster and gradually expand into other related areas. However, in the face of macro and geopolitical uncertainties, customers are getting more prudent and seeking more bang for their buck and taking longer to take decisions. To accommodate this shift in preference and uncertainty, we have decided to revisit the guidance as alluded by Ashok earlier. With the creation of the GenAI BU, I'm happy to share that the we're merging PES and DBS business units into one Product and Digital Engineering Services business unit as a first step in our strategy to [ work life ] and better leverage synergies and capabilities as part of our $1 billion goal by 2031. I'm excited to be given the responsibility to lead this integrated business unit and draw learnings across customers, better focus on white spaces and take our land and expand strategy to the next level. With this, I would like to end my commentary wishing you -- all of you a Happy Dussehra, and I will now hand over to my colleague, Rajiv.

Thanks, Joseph. I'm really excited to guide this new function of GBS and work with a fantastic team led by Sridhar Mantha, President and CEO of GBS. At Happiest Minds, we are known to take technology best well ahead of time. Take, for example, IoT, which we started building capabilities well ahead of time around 2015 before it became a mainstream area of investments for the customers. We've been working since 2018 on the earlier form of GenAI as part of our AI focus. With a strong pace of AI and analytics capability, the dedicated focus to GenAI will open up significant opportunities for Happiest Minds. Over the next few months, we will define processes and time lines to ensure that all of our 5,000-plus Happiest Minds get exposed to the practical application of GenAI in their line of work. The charter includes training on GenAI and develop teams to engineer business solutions and outreach to our existing customers and showcase our progress in the space. We're already working with 20-plus customers in the GenAI area. We will strengthen and forge new partnerships in the alliance ecosystem, including working with Microsoft, OpenAI, Google, AWS, et cetera, and other open source platforms as well. A broader go-to-market strategy to the addressable market with our value proposition, start tracking the financial parameters of the GBS going forward. And we'll be starting -- we'll be announcing them for the next financial year, as highlighted by Ashok. To conclude, we foresee that generative AI can be a significant revolution for us in the years ahead and help us reach our vision of becoming a billion-dollar enterprise by 2031. With this, I end my commentary, and we can now open up the floor for Q&A.

[Operator Instructions] We'll take the first question from the line of [ Ashish Dash ] from Mirae Asset Capital.

So my question is on the guidance. You have made a cut in organic revenue growth guidance. I wanted to know what happened during the quarter so that you cut this guidance directly from 25% to 12%. And also, you mentioned last quarter that there is a recovery in the demand. You were expecting recovery in demand in 2H. What is your view on that right now?

Venkat, shall I just address against the point on -- overall on the guidance. And then I guess, really, all the business people can talk about what they see about demand vis-a-vis any other statements we may have made. And so you're right in one sense that we've never differentiated in the past from -- between organic and inorganic growth. We were certainly expecting, even as we began the year, to get almost a whole year on a very large acquisition getting reflected in our results. And therefore, the numbers that we have projected were really not out of line to the extent that this particular guidance will indicate. On the other hand, we also know that getting an acquisition through is sometimes a bit of a uncertainty. You really don't know whether the deal will go through or not. This particular deal we are talking about, actually it has not gone off the table even now. And yet we don't expect even -- assuming we even close it this year, we don't think we'll get any revenue out of this. So that is the major dramatic increase item, which led to the difference in this guidance. Overall, there's no question that the markets have had declines. You see this in the results of all the entities who have been declaring their results. And in that respect, I'd say our result continues to be, as we said, an industry-leading performance. Some of the issues on the -- in terms of giving color to this as well as the demand outlook, I think my colleagues will take up for you, and I think it's really best -- each of the 3 business units gives you the response to this particular point that you've raised. I do want to add that we do need -- see a need for giving a further thrust to growth. And that is one of the reasons why we have created this GenAI business unit. It's a major change. We believe nobody has taken a change of this sort towards addressing this opportunity. It won't yield results overnight, but we believe in the long run, it will certainly play a very -- not only long -- medium and long run, it will play a very important role in terms of taking us on to our declared vision of achieving $1 billion by 2031. So with this, let me pass this over to Joseph, Ram and lastly Rajiv, because he can then also talk about the new business area.

Thank you, Ashok. And before I talk about the overall demand environment, I just want to sort of give a little bit of context on Q3, I think all of us have to be cognizant that Q3 has a lower number of working days, which is around 3 days lesser than the other quarters because of the Dussehra, Diwali and Christmas holidays. And we're trying to work our way through that. So I just want to put that as a context. Now if you look at the broader demand environment, I see customers having enough needs and initiatives that they need to get done to digitize their processes, their offerings and the way they interact with customers. So that's as a -- at [indiscernible] level, I see the demand is there. What we also are seeing is that just given some of the macroeconomic, I would say a little bit of uncertainty, but more importantly, at repeated intervals, some geopolitical developments there's also a little bit of that -- let's take a look at what's going to happen. And instead of having large initiatives that they would typically have started, they're looking at doing things in smaller -- multiple smaller packages. And to this, as I mentioned earlier, works out to a Happiest Minds' advantage because we are not looking for $20 million, $100 million kind of engagement. We're looking at engagements where we can go and work closely with the customer, validate some of their assumptions, doing POCs, pilots and then take it to implementation. And while it elongates the sales cycle a little bit, it actually works to our advantage of a company that's more agile, that's nimble and more of a partner than a vendor. And that's what we are seeing in terms of demand.

Yes, this is Ram. As Joseph mentioned, there will be holiday season and lesser number of working days in quarter 3. But that is also a period where lot of budgets are going to be finalized for the subsequent year. And we believe that the beginning of the next year will be much more better and that is something which you're seeing in the market. Apart of that what I'm really excited is about our integration of PES and DBS business, which actually makes IMSS to become a horizontal across all the verticals and thereby enhancing your land and expand strategy. And also the GBS business, which will also bring a lot of Generative AI capabilities in the IMSS space as well, whether it is in terms of service desk automation or in terms of security and infra operations where GenAI can be very easily integrated to provide better solutions for our customers, and that is what customers are also looking at. So looking ahead, with the integration of PES and DBS and also creating the GBS, I believe that there will be much better opportunities for us to land and expand in our existing customers and go after new business. Over to you, Rajiv.

Thank you. So just adding to what Joseph and Ram said. If you've felt some sort of uncertainty that continues to happen and there is a pressure on the macroeconomic environment. So given that I think the kind of work that we perform for our customers and the values that we deliver, we continue to see a level of traction. We're still under continuous cost pressures. We still want to take advantage of newer technologies, OpenAI, ChatGPT, Generative AI, et cetera. And with our platform of integration of low-code data, AI, et cetera, I think we are in the right space for us to really provide -- create value for our customers. At the same time, you have larger integration opportunities as well because customers are looking at optimizing their own environment, monetize their own set of investments is to continue to see more and more integration opportunities. So from that perspective, I think that we -- the reason we set up the GenAI unit is to really work with the customer to really help them drive how to set up their own organization, how to increase consumption in their own environment, at the same time, optimize their own environment to become more efficient and effective as well. So yes, there is pressure. There are disruptions that are affecting all of us. But fortunately, there is no cancellation of contracts or no real price pressures that we have undergone. But at the same time, the opportunities are there as well.

Okay. So one follow-up question on that. So you are saying there is no cancellations and no pricing pressure. So are we thinking that the inorganic contribution would have been more than 10%, but as it got delayed, so that contribution is not coming. And yes, that is the reason? Or do you see that also, you cut down your own organic growth guidance to 12%? Just wanted to know your view.

Yes. Venkat, again, I'll take it and maybe this time, you may want to add a little bit. So the first really important thing is to say that actually, there was never any distinction in our guidance between organic and inorganic. So we ourselves didn't internally say so much will be organic, so much will be inorganic. And largely because we were to visualize there when a company of our size is planning even a decent-sized acquisition. Let's assume there's a company with $50 million. That's going to impact us in a very significant way whereas you take a multibillion-dollar company, even if they do $100 million as an acquisition, it doesn't matter. They don't need to make the distinction. They may get $100 million account or they may get that acquisition, either way, it will become a part of their growth story. Whereas in our case, it's a very distinct difference. It has to make a distinct difference. And it's another matter that in the previous years, we managed to obtain the reset guidance number in spite of the fact that we had really very little acquisition, negligible, I would say. Here, obviously, while we were hoping for one, it isn't that we made a distinction even this year, so to that extent, it's difficult for me to say that because we had planned to say x percent, but now we've reached 12% that is a reduction. That is not the case. It was a composite total, and that is why we are now giving you a non-composite total because we know the acquisition element is not going through. And therefore, we're giving you the numbers reflecting the current state of the market. Venkat, you want to add anything to it?

Ashok, I'm not able to hear Ashish very clearly. So that's why I'm not able to...

But -- were you able to hear me clearly?

There is a little bit of static when you speak as well, but I understand this is about the guidance and...

But if you've not heard us clearly, you go ahead and explain though I believe, maybe we can ask Ashish whether he's got what he needed from my response.

Sure.

I got your response, but still. Last question from my side. Do you still pursue the acquisition plan during 2H though it got delayed?

Now you have to repeat your question, even I have not heard you clearly this time. Can you say that again?

Quite a bit of static on the line, I guess.

Can you hear me? Is it better now?

I can hear you very clearly now.

Mr. [ Dash ], I would request you to kindly use your handset sir. Because when you use your headphones, there is a lot of static on the line.

Okay. Is it better now?

Yes, much better.

So my question is, do you still pursue the acquisition plan during 2H though it got delayed?

Yes. So very clearly, there's been -- I mentioned that in the very beginning. We clearly had an expectation of a very large acquisition. And I also mentioned that, that's not gone off the table. But we don't expect any -- if you're considering the stage we're now, we've not signed, let's say, at least a letter of intent and begun due diligence. You won't get any revenue into this year. Maybe in a smaller entity, we may get a small bit of revenue, which is why we've said, additional revenue from acquisition, if any, will be above the 12%. But the larger one, if it's signed during this year, it will yield revenue only in the next year. So that's -- but it's not gone off the table, that is a good news. And hopefully, it becomes true.

[Operator Instructions] The next question from the line of Sumeet Jain from ICICI Securities.

Just want to probe on guidance. So actually, I mean, if I look at our 12% organic growth guidance for FY '24, that does imply a CQGR of around 5% to 6% for the second half of FY '24. So I just want to understand what gives you confidence of a sharp revival in growth in second half given an overall weak macro environment from the discretionary spend perspective?

Venkat, do you want to handle this? So, Venkat?

Yes. I just joined again because I...

So did you hear the question from Sumeet?

No, I didn't hear.

Yes, Sumeet, please repeat it for Venkat.