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

Ladies and gentlemen, good day, and welcome to the Happiest Minds Q1 FY '27 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Mr. Aditi Patil from ICICI Securities Limited for opening remarks. Thank you, and over to you.

Thank you, Ryan. Good morning, ladies and gentlemen. Thank you for joining us today on the Q1 FY '27 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 call. Today, we have with us Mr. Joseph Anantharaju, Co-Chairman and CEO; Mr. Venkatraman Narayanan, Managing Director; Mr. Ram Mohan, CEO, Infrastructure Management and Security Services; Mr. Sridhar Mantha, CEO, Generative AI Business Services; Mr. Praveen Darshankar, Company Secretary and Compliance Officer; Mr. Anand Balakrishnan, CFO; Mrs. Priyanka Sharma, Head, Investor Relations. I will now hand it over to Priyanka Sharma for the safe harbor statement and to take proceedings forward. Thank you, and over to you, Priyanka.

Thank you so much, Aditi. Good morning to all participants on the call, and welcome to the conference call to discuss the financial results for the first quarter ended June 2026. I'm Priyanka Sharma, Head of Investor Relations. We hope you have had an opportunity to review the earnings release issued yesterday. Now let me quickly walk you through the agenda for today's call. Joseph will begin by sharing his perspectives on the business environment, our strategic priorities and overall business performance. Sridhar will touch upon AI-led transformation initiatives and progress around AI-led engagements and capabilities. Thereafter, Venkat will take you through the financial and operational performance for the quarter, followed by our outlook for FY '27. Following the management commentary, we will open the floor for Q&A. Before we begin, let me read the safe harbor statement. During this call, we may make forward-looking statements. These statements reflect the environment we see as of today and involve risks and uncertainties that could cause actual results to differ materially. We do not undertake any obligation to update these statements periodically. With that, let me hand it over to Joseph.

Thank you, Priyanka. Good morning, everyone, and thank you for joining us today to discuss Happiest Minds Technologies' financial results for the first quarter of FY '27. We started FY '27 on a strong note, reflecting the continued trust of our customers, the resilience of our operating model and the growing relevance of our capabilities as enterprises accelerate investments in AI-led transformation, digital engineering, cybersecurity and automation. As most of our peers have reported their quarterly performance, we are encouraged by the relative strength of our own results. We believe this reflects the strength of our AI-first strategy, the breadth of our digital capabilities and our disciplined execution in an evolving market environment. Our operating revenue for the quarter stood at INR 629 crores, representing 14.3% year-on-year growth in rupee terms. In constant currency, revenue grew 2.6% sequentially and 6.7% year-on-year. We also maintained a healthy EBITDA margin of 21.7%, while continuing to invest meaningfully in AI capabilities, enterprise platforms, talent and go-to-market initiatives that will support our long-term growth. Venkat will talk more about our results. This [indiscernible] start to the year reinforces our confidence in the resilience of our business and provides a solid foundation for the year ahead. Let me now turn to the market conditions. The demand environment remains mixed with discretionary spending continuing to be selective. At the same time, enterprise technology investments are increasingly shifting towards AI-led transformation, data modernization, cloud, cybersecurity and productivity initiatives. We believe AI is fundamentally reshaping the future of enterprises. As organizations move from experimentation to scale deployment, the conversation has shifted from whether AI should be adopted to how quickly it can be deployed securely and at scale to create measurable business value. This is reflected in the continued strength of our demand environment with our pipeline remaining very strong, providing us with confidence in our growth outlook. Our AI portfolio continues to expand with over 100 AI agents, around 60 repeatable use cases and suite of AI-powered solutions and accelerators, enabling faster deployment, greater use and stronger customer outcomes. Sridhar will provide more details on our AI strategy. Beyond our services business, we continue to strengthen our portfolio of proprietary platforms and repeatable solutions. Our enterprise AI platform, together with Arttha, Insurance in a Box, Multi-Omics and EduWeave platforms help customers accelerate AI adoption while allowing us to combine proprietary intellectual property with our engineering capabilities. These platforms create differentiated entry points into customer relationships, lead to nonlinear growth and support larger long-term transformation engagements. Some notable wins during the quarter included our selection as a strategic data and AI partner for a leading North American energy infrastructure company, and AI-powered test automation engagement for a leading Australian insurance provider, a digital commerce modernization program for a leading Indian national -- multinational CPG company, a sales force based product engagement for a global consulting company and a multiyear managed security service engagement with a major Middle Eastern retailer. From an industry perspective, growth was led by Healthcare & Life Sciences, which grew 22% year-on-year and 4% sequentially. BFSI remained our largest vertical at 27% of revenues, while EdTech contributed 16% and delivered modest growth. Hi-Tech too recorded a strong sequential recovery. Geographically, the Americas continued to be our largest market, contributing 57% of revenues. Growth was increasingly diversified across our other markets with India and APAC growing approximately 9% and 10% sequentially, respectively. This broader geographic participation provides us with greater balance and supports our long-term growth ambitions. Looking ahead, while the macroeconomic environment remains mixed, we believe the structural drivers of technology spending remain firmly intact. Enterprises continue to prioritize AI, cloud, cybersecurity and data engineering areas where Happiest Minds has deep capabilities and strong customer relevance. Supported by healthy pipeline, disciplined execution and increasing AI adoption across our customer base, we remain confident in our strategy. With that, I will hand over to Sridhar, who will take you through the progress behind our AI strategy. Sridhar, over to you.

Thank you very much, Joseph, and good morning, everyone. Joseph has shared how our AI-first strategy is creating momentum in the marketplace. Let me now take you through the engineering capabilities, enterprise platforms and delivery innovations that are enabling those outcomes for us. Our efforts are centered around 3 priorities. The first one is, as we shared in the previous quarter, creating a secure and reusable enterprise AI platform that can be customized for various domains and create vertical solutions on the top of it. The second one is, of course, embedding AI across the entire software development life cycle and in all the services that we provide to our customers. The third and the last one is delivering measurable productivity and quality improvements for our customers because various AI technologies that are being adopted are so new in the marketplace. Our enterprise AI platform provides a modular, secure and model-agnostic foundation for enterprise AI adoption. A key design principle is reuse, enabling customers to leverage reusable [indiscernible] flows and accelerators rather than building every AI application from scratch. This significantly reduces implementation time, improves consistency across deployments and allows domain-specific AI solutions to scale with appropriate governance, security, along with human oversight for enterprise environments. We are equally focused on transforming the way software is engineered. At this point, we have more than 2,000 Happiest Minds that are using advanced agent and AI development tools and our engineering teams today generate more than 2.5 million lines of code with the help of agents every month. This reflects the increasing adoption of AI across our software engineering life cycle. More importantly, AI is helping shorten development cycles, improve code quality, strengthen documentation and also increase the test coverage and accelerate application development and modernization, while all outputs continue to undergo our established engineering security and quality review rigor. Our reliable platform is enabling customers to adopt agentic software engineering within secure governed enterprise environments, allowing human engineers and AI agents to work and collaborate together throughout the entire development life cycle. Beyond software engineering, within Happiest Minds, AI is also driving measurable improvements across all our delivery operations. A few examples are within our infrastructure services, approximately 60% of the identified provisioning scope has been already automated with the help of AI tools, resulting nearly twofold improvement in provisioning speed. Another example is within application integration, now AI automation is covering the identified process scope and contributing to estimated 80% reduction in our efforts and of course improve the quality. We're also embedding AI across quality engineering, infrastructure operations, cybersecurity and data engineering as demonstrated by the AI-powered test automation engagement that Joseph highlighted earlier. As AI adoption scales, responsible governance also becomes increasingly important. Security, privacy, model governance and human oversight are therefore built into both our enterprise AI platform as well as in the delivery process and methodology that we have within Happiest Minds, which is enabling customers to innovate with confidence while maintaining the enterprise-grade controls. Overall, we are very encouraged by the progress and we continue to believe the milestones and metrics we have shared today demonstrate that our AI strategy is translating into tangible execution. Our focus remains on converting AI from a promising technology into measurable business outcomes through enterprise platforms, reusable IPs, engineering excellence and disciplined execution. With that, let me hand over to Venkat, who will walk you through our financial and operational performance for the quarter. Venkat, over to you.

Thank you, Sridhar, and good morning, everyone. Over the next few minutes, I will take you through our financial and operational performance for the first quarter of FY '27 and conclude with our outlook for the year. We have started the year on a very solid note, delivering another quarter of profitable growth despite a demand environment that remains selective. Operating revenues for the quarter stood at INR 629 crores, representing a growth of 4% sequentially and 14.3% year-over-year. In constant currency, our revenues grew 2.6% sequentially and 6.7% over the previous year. Total income for the quarter came in at about INR 652 crores, representing a growth of 4.9% sequentially and 12.5% year-over-year. The quarter was, one, a continued -- we continued to see improvement in demand across the spectrum of services together with good execution from our side across our business. Turning to profitability. Our operating margin stood at INR 108 crores, has shown growth of 2.32%, while continuing to be at about 17.5% of revenues. This is incidentally almost the same as it was last quarter and the quarter last year. This margin performance was despite the currency loss on our forward contracts of about INR 11 crores and a spike in provision to account for delayed collection of receivables of about INR 5 crores and both of them compared to the previous quarter. Only for a pure comparison purposes, if I adjust these 2 [indiscernible], our operating margin stands at about 19.75% and higher than our not guided range, but what I was saying as an expectation for us to be 17.5% to 18.5%. Coming straight to our adjusted profit after tax for the quarter, it stands at about INR 80.5 crores, which is 12.3% of our total income, showing a growth sequentially of 12.9% and year-over-year 14.7%. To clarify, PAT adjustments do not account for the ForEx losses or provisions for receivables that I talked about just a while back. These adjustments only relate to acquisition costs, which I [indiscernible] believe accounting noise, and I have been adjusting for them over all the previous quarters. Our healthy adjusted PAT aptly reflects our growth of adjusted EPS as well, which for the quarter stands at INR 5.34 year, up 17% year-on-year. Our profitability continues to reflect disciplined management while continuing to invest in AI and platforms, sales capacity, future-ready talent. From a capital efficiency standpoint, ROCE improved to 23.9%, while our ROE stands at 15.5%, both up from 21.8% and 12.8% [indiscernible] improvement and this has been a focus for us. We closed the quarter with cash and cash equivalents of about INR 1,743 crores compared to the INR 1,679 crores last quarter. Talking about some operational metrics, we ended the quarter with about 306 active customers, which is same as last quarter, while the number of billion-dollar corporations we serve has increased by 1 to 92. These billion-dollar customers of ours contribute about approximately 60% of our revenue. [indiscernible] continues to remain [indiscernible] about 94.4%, reflecting our customer [indiscernible] relationships and the confidence reposed by them on us. Working capital discipline is an area of [indiscernible] improved to 92 days from 94 in the previous quarter, we did have to account for some onetime provisions, which I talked about earlier. And let me assure you that, that was us being conservative on account, and we are leaving no stone unturned to collect most of those provisions. We ended the quarter with about 6,530 Happiest Minds. Utilization moderated marginally to 81%, about 0.4% reduction, not a cause for concern. And our hiring has been up by about 32 people on net terms. Our utilization of [indiscernible] is healthy, but it also continues to be an area of focus in these fast-changing times. Our voluntary attrition has improved from 17% in the previous quarter to 15.4% this quarter. Looking ahead, our priorities remain clear and unchanged. We continue investing in AI, talent, go-to-market capabilities and operational scale to support sustainable long-term growth. While the macro [indiscernible] remains mixed, we are encouraged by the strength of our pipeline, accelerating AI adoption and the resilience of our business model. On the strong start to FY '27 [indiscernible] we have today, we continue to focus on achieving our FY '27 revenue guidance of 12.5%. I'd like to thank our customers, partners, shareholders and every Happiest Mind for their continued trust, commitment and support. Thank you for joining us. And now I'll turn this over to you for questions.

[Operator Instructions] We take the first question from the line of Aditi Patil from ICICI Securities Limited.

Congratulations on good set of numbers in Q1. My first question is on our revenue outlook. We had shared a revenue guidance of at least 12% Y-o-Y growth in FY '27. So this implies a strong CAGR for rest of the 3 quarters, around 5%. So what kind of visibility do we have for this kind of growth? Is it based on already won deals or it also depends on converting pipeline in coming quarters? And if you can share how your deal TCV has grown on a Y-o-Y basis, maybe qualitative commentary on it? And does the guidance include any contribution from potential acquisitions?

While I'll answer [indiscernible] our growth numbers do not include any acquisitions, but [indiscernible] concept we have got on board. The second thing is on TCV. We have not been disclosing that number [indiscernible] IPO. And it's something that we are beginning to internally track because our philosophy or our growth philosophy has been anchored on the land and expand strategy [indiscernible] TCV is not something that makes sense or at least we have not seen it -- we are not able to relate that to the numbers, which is why we have always been talking about repeat business customer additions and our customer cohort, revenue from our customer cohorts, which is 50% with customers who have been with us for more than 5 years and less than 5 years. So all of these put together show the health of the revenue and repeatability. Joseph, the rest on the...

[indiscernible] Venkat started off with. Aditi, as I mentioned earlier in my commentary, our pipeline is strong, and it's both sequentially as well as especially year-on-year, it's grown significantly, right? And in terms of the ensuing 3 quarters, I would agree with you that we have our work cut out. We need to continue delivering good results to get to the guidance that we had provided at the beginning of the year. Now in terms of how we see that happening, we do have -- it's a combination of all that you mentioned. We have a few mid- to large-sized deals in the pipeline, and we will need to convert a couple of them, which will start giving revenues in Q3 and Q4. We've closed a couple of large deals, one of them in Q1 and another one just a little earlier this month, which will need to step up and we will get into 3 digits in terms of the total size. And we have a few others that we've closed, where we are implementing the first or executing the first project based on which we expect to get more such projects and engagements. And I shared a few of our wins in the commentary in our press release as well, we have a few of these wins listed out, which should lead to growth. So it's a mixture of all of these. And the third area I would say is some of the existing customers that we have, we have a strong program and initiative in place to expand our presence out there. That also I expect will contribute to our growth. There is also [indiscernible].

Last quarter we had talked about movement or right shifting of 2 Arttha banking deals. One of it is getting extended. We are not very hopeful, to put it that way. But the other one is taking time to close, and we are hopeful that it will close in the second quarter. Also, pipeline, our nonlinear growth platforms like EduWeave, Insurance in the Box are quite reassuring. There is also that lumpy revenues that could come. There is also one point, which, Aditi, at some point in time we'll discuss this with you because that was coming a lot from Middle East, India and Southeast Asia and APAC, that constant currency, we are getting hurt because we are dividing the volume growth by dollars, but that's something that we'll have to figure out how to account for that in our growth targets. So these are the things that we are looking at helping us in the ensuing quarters.

Okay. Got it. And my next question is on the nature of deals in Gen AI business unit. Are these more short cycle deals with lesser recurring component? Or do we see recurring component in these deals? And on the margin for Gen AI business unit, there was a sharp increase in the segmental margins in Q1. So what should we consider as steady-state margins or steady-state cost or investments in GenAI BU.

This is [indiscernible] question, the first questions. The first part of the question is still 1 year back, your observation was right [indiscernible] as well as especially within Happiest Minds also, we used to work more on use case-based engagements because the customers themselves were not very clear about what kind of ROIs they can get and how technology with AI can help their business problems. However, in the last few quarters, more than a year, we slowly started shifting towards 2 specific models. One is more of a thought kind of model where the customers want us to act as an external engineering team to help them with their AI journey. And second and last category is, as we mentioned in the previous quarter also, we started closing more deals that has both AI components as well as the digital transformation as a bunded larger deal. So both of these are helping us to move very rapidly [indiscernible] point use cases, fixed bids into more of long-term engagement and larger transformation.

Just wanted to add one point out here, Aditi. I think what we need to start differentiating is the execution model and the contract model, right? Because with some of our customers, even though it would be T&M, but we have some SLAs or some outcomes embedded into those contracts. And I look at that as being more outcome-based because if not for the fact that we are able to promise those outcomes, we would not have won those deals. So we are beginning to see that aspect as well because in this model, the customer has some flexibility to move priorities around, while at the same time, holding us accountable for outcomes.

The second part of the question, Aditi, is, of course, on the investments that happen, right? We did talk about the enterprise AI platform and now the GBS revenue footprint being relatively smaller compared to the overall number, you may see some fluctuations within GBS because of the constant investments that continue to happen.

And on the margin front, Aditi, at the end of the day, it's all got to do with utilization. Our utilization has nicely picked up. Also, there's quite a bit of cross-selling happening from the other BUs into AI, generative AI, that's also helping, which is showing up on margins. So the idea was when we started GBS, it should soon become at least 10% of the overall company's business. But while that doesn't progress, AI has penetrated into everything else that we are doing. We did mention this in the last call as well, maybe in the -- by the end of next quarter when we publish our results for Q2. We want to [indiscernible] most other companies have slowly started publishing that, but we want to have -- we are doing a thorough run on those numbers and come back to you. So that gives you the total AI-led revenues [indiscernible] AI-led revenues which [indiscernible] various other parts of the business [indiscernible] and the like.

Okay. Got it. And just one confirmation. So we usually do annual wage increment in Q2. So this year also is it planned for Q2?

Yes. We have [indiscernible] it's a good point you make. Yes, there will be an adjustment in our margin, which has been traditionally how it has been for us. We'll have to claw back on that through both volume increase and value increase and growth that we see.

Okay. So the entire increment impact will be in Q2, correct?

No, it will be -- obviously, we'll have to look at [indiscernible] numbers, the industry and all of that. So that's one. But whatever is being done, a large part of it because you have got structures of up to C7 is in Q2 and about C7, C8 is in the month of October. So we split that and we do. While we temper that in line with business and the demand scenario that we have seen, we are also -- that's why I gave you a little bit of an insight [indiscernible] margins that we had this time just because of those one-off noises, it did kind of [indiscernible] back at 17.5%. Some of that will also come to help us for the Q2 and the margin when the wage increase happens.

We take the next question from the line of Vinesh Vala from HDFC [indiscernible].

So I have a few questions. First on the guidance part, as you told that 12.5% revenue growth for FY '27 will be driven by pipeline conversion and which we have a strong pipeline and new deal wins in the line. But as you told that discretionary spending [indiscernible] cautiousness. So what are the key risks that could impact our guidance of 12.5%?

[Indiscernible] when I made my statement on discretionary spend, I also said that it's happening in the right areas. And what we are seeing [indiscernible] can you hear me, Venkat?

You're going in and out, so maybe [indiscernible].

Okay. Let me start again. So Vinesh, if you noticed the statement that I made on discretionary spending, I said that it's being pushed or happening in specific areas, right? And what we are seeing is that the customers are optimizing using AI, some of the support and maintenance and infra activities, the run part of the operations, right? And then taking that savings and deploying it on some of the AI and other innovation, right? And so that's what we are seeing. And if you ask me what is the risk that I think, I think it's the elephant in the room, right, if you look at the current war and the impact having on inflation and other things. I think that dragging out for too long is what I would see as a risk right now to sustaining the kind of performance that we've delivered in Q1.

Okay. And another thing was on the FY '28 aspiration we had of 15% growth. So are we sticking back to that 15% aspiration for FY '28 or we are good to give only FY '27?

Vinesh, that's an aspiration that continues. So there is no change to that. So we have 12.5%. The idea is that this helps set up a good platform for the growth in 15%. Obviously, like every good thing that you say, there are risks attributed to that, which is what Joseph just called out in terms of war, a possibility of -- maybe I don't know if I'm reacting too much, but there is -- there seems to be some sort of a reality check in the AI world itself about how -- what's the CapEx and how spend has to be. So these things have kind of a trickle-down effect on sentiments. It's just not the macro picture. The macro picture obviously is what it is. You have all the geopolitical disturbances. But accounting for all of that, I think the target for the year for us is 12.5%. And if we do that, that will really set up a great [indiscernible] platform. Because we are making all these transformation changes only to make sure that the platform is in place for the growth aspiration of the team next year. So be it the long -- the good pipeline. The deal sizes in our pipeline are increasing. We are seeing business commitments in our new sign-ups go up. Repeat business is improving. The new business pipeline is changing for the better because that was a change that we did bring in through [indiscernible] business. The entire restructuring of the business into 2 BUs under PBES and infra security and infra and security also doing well. So see, all of this is -- all of it comes together, pistons fires, our aspiration should not change. The platform should be in place for us to do that.