Demand for cloud offerings remains strong: Happiest Minds Technologies

Mid-tier IT companies continues to perform well despite some early indication of growth moderation in the third quarter. With many of these companies offering specialised digital services to enterprises, they are hopeful of overcoming slowdown blues. Bengaluru-headquartered Happiest Minds Technologies is confident of clocking 25 per cent growth in revenues with operating margin touching more than 25 per cent for FY23. In a conversation with the Bizz Buzz, company's MD & CFO, Venkatraman Narayanan said that the company witnesses growth in key verticals remaining strong barring few pockets of weaknesses. He said irrational exuberance seen in some segments is fading away along with Covid-induced pent-up demand normalising in the recent quarters. The company sees a robust deal pipeline with more than 90 per cent of its business coming from repeat customers. Going ahead, it is hopeful of maintaining its growth curve with some moderation in the next financial year. The company is witnessing employee attrition numbers going down and expects to trend further lower in coming quarters. On the back of strong digital offerings, it is hopeful of remaining critical to enterprises' technology operations in coming quarters amid recession fears. To boost its inorganic growth rate, it is also actively looking for acquisitions for building new capacities

How is the overall demand environment? Is it changing owing to slowdown fears?

I will say mid-tier IT firms are doing decent but underlying tremors are there. We can't say that everyone is running around to give projects but at the same time, there are business to be won and there is growth. There is obviously reprioritisation of projects happening and people are putting money into those projects which give immediate returns. Demand situation looks fundamentally good but everyone is thinking that what will happen to the macroeconomic situation. People are not funding ideas without proper business plan. People are not throwing money at ideas.

So, the commentary remains similar to your large peers. But big firms are saying that cost takeout deals and vendor consolidation have started to play out. Are you seeing deferment happening in case of digital deals?

I am not saying deferment, what I am saying is prioritisation. If there are five things to be done in a company, they are looking at where they will get bang for buck quickly. Also, there are cases of investment projects. Such projects are being carefully evaluated. Where investment has been done, companies are doing that but there is reprioritisation happening.

As far as cost takeout projects are concerned, we as a company are not playing as a cost only as a basis. Our pricing is demand-based and business-related technology services is what we work on. So, it's not that come to us and it will be cheaper. We work on the principle of what kind of value we bring to the table. But, post-Covid, there was pent-up demand and that demand will start to normalise. This fiscal year, we are tending towards a 25 per cent revenue growth. For next (fiscal) year, we will do a mix of organic and inorganic and see how that growth coming up. In organic growth terms, we are fundamentally strong.

How are the different verticals performing for Happiest Minds Technologies? Are you seeing any strain in edutech, hitech verticals?

There may be some weakness in some verticals like we are seeing cautiousness in retail (among clients). There is business but clients may be little cautious in some of the verticals. In any business if the vendor starts doing business based on unsubstantial expenditure without proper foundation and we start counting chickens based on that, it will not be proper. Hitech vertical is fundamentally strong. Keep away the irrational exuberance, the fundamental growth is there. All our verticals where we are operating are growing fundamentally whether it is travel, BFSI (banking, financial services & insurance), edtech, hi-tech and others. There was irrational exuberance in some verticals like edtech in India, hi-tech in parts of Europe. BFSI is always stable except may be in parts of fintech.

Have you seen any client-specific issues due to such irrational exuberance in parts of some verticals? Do you expect it in the future?

We have not seen client-specific issues. But, there is caution in part of these verticals because of what is happening with some players.

What are your growth projections for the fourth quarter of ongoing financial year?

During the third quarter, the sequential growth was little subdued but fourth quarter growth should be all right. This is because the leaves and holidays should not happen in the fourth quarter.

We see growth moderation among hyperscalers. Does it indicate that demand for cloud services is coming down?

People have bought licenses (subscription for cloud-based services) in anticipation of growth and now those licenses have to be put to good use. So, direct corelation between hyperscalers' license growth and cloud service growth of IT services providers is not right.

Can you throw some light on the performance of Europe and India during third quarter and going ahead?

India is doing well. Growth in Europe is little slow. But, we are doing very well in Middle East, Australia and the US. Europe remains a geography of focus and investment this quarter and going forward. As far as growth in the US is concerned, we have our fingers crossed and hopefully, growth will remain sound in that geography.

Attrition is inching down for all service providers. What kind of margin support can you expect from easing of supply side pressure?

Yes, attrition is coming down. Hopefully, it should go down to 13-14 per cent in next couple of quarters. We are committed to hiring another 300 of campus hires for next year. Lateral hiring will depend on business requirements.

As far as operating margin is concerned, we have given a guidance of 22-24 per cent and we are at 26 per cent. Hopefully, we will be able to maintain that kind of margin number in the fourth quarter. For the whole financial year, we should be growing at 25 per cent or more in revenues. We have already started laying the foundation for next year and year after. We are looking at acquisitions and building up capabilities.

How is the deal pipeline? Are you slowly shifting from short-term digital projects to multi-year engagements?

Deal pipeline looks good. 92 per cent of our business comes from existing clients. That is the comfort, our clients have in doing business with us. From the third quarter, we have started providing an additional metric that indicates that 50 per cent of our business comes from customers who are with us for more than five years. That metric coupled with 92 per cent repeat business and 100 per cent digital work we do, it provides us comfort regarding customer stickiness. Stickiness is very high because we are providing value. We are doing something that matters to our customers.