Demand for digital services continues to be strong: IT firm Happiest Minds

Ashok Soota-promoted mid-tier IT services company Happiest Minds has revised its revenue guidance to 25 per cent for fiscal FY23 on the back of strong demand for its offerings. The Bengaluru-headquartered company has also said that it is confident of being a $1 billion revenue company by 2031 with a CAGR of 25 per cent. Despite talks of slowdown in the US & European markets, the IT firm said demand environment remains robust with no signs of spending cut by enterprises. The company is also building up its consulting muscle in order to move up in the value chain. In a conversation with the Bizz Buzz, company's Managing Director & chief financial officer, Venkatraman Narayanan & Joseph Anantharaju, executive vice-chairman & CEO – Product Engineering Services (PES), said that supply side issues in terms of talent demand is likely to be resolved in couple of quarters. They said that issue of attrition faced by the industry is not structural and employee churn will come down as demand and supply are more aligned. The management of the IT services company also said that spending in the key markets like US and Europe remain strong as they gather from their conversation with clients. The company will work on an utilisation level of 77-78 per cent for managing the new demand better, they said

Is there any specific reason for raising Happiest Minds Technologies' revenue guidance to 25 per cent for FY23 along with coming up with a plan to be $1 billion company by 2031? What prompted the company to announce such long-term pan at this point of time?

What we have done is that, we have reconfigured our growth number. The billion dollar revenue company by 2031 is something, we have always presented to the market. We have also said that we would grow by 20 per cent year-on-year basis. A simple calculation shows that 20 per cent CAGR will take us to $700 million- $800 million revenue not taken us to a $1 billion target. We have said that the remaining revenue would come from acquisition. Now, to simplify the whole thing, we are taking away the whole thing of organic and inorganic growth rates. We are saying that we will grow 25 per cent CAGR and it will have significant contribution from inorganic route.

Now, for the just-ended first quarter, we are fairly confident of 25 per cent growth in revenues in the current financial year, which we will achieve organically. While we have raised revenue guidance, we have held on to our margin guidance of 22-24 per cent.

Most mid-tier IT firms have performed well in the first quarter of FY23 as compared to their large peers. What are your views on such outperformance?

There are questions we are facing like is there a contraction in demand & what about demand? There are two messages we want to send out. Look, when we look at our own house, it seems to be all right as of now. You don't know what you don't know or what can happen tomorrow. Secondly, we look at demand for digital services and it continues to be strong. Somebody will have to draw a line. You can't build a company basis on fear of what will happen.

We heard the management talking about consulting business. Can you throw some light on this aspect?

We are talking about techno-business consulting wherein we sit with the customers objectives and we translate that how the IT system should look like. What we have been doing so far is technical consulting. We are working with customer on technical level. Now, we want to move to the second level. What we want to do in this is that we want to corelate the technical work we are doing with business outcomes. Therefore, we have brought on board domain experts for many of the verticals we are present in. We want to jointly work with our clients on their business objectives and business cases. Then, this will be translated into IT roadmaps. We don't want to enter into strategic consulting. We are also saying it is consulting-led business.

How big is the team now? When can we expect tangible dividend coming out of such investment?

Look, we see it as part of typical billable resources. Each vertical is hiring based on their domain-expert requirement. For instance, the manufacturing vertical has 10 domain experts. As far as outcome is concerned, the team is already engaged with one of the large automotive companies of India and helping them with several digital initiatives. We have teams engaged with clients in Europe. So, they are already there.

In the current earnings season, we have seen that demand environment remains strong in the US despite slowdown talks, Europe is showing early signs of slowdown and Indian market remains strong. Can we say that is also the case for Happiest Minds?

India has been strong for us. We are getting 15 per cent of our business from India. That has been consistent. The US is where most of the technology spend starts. What we get from India is largely a follow through. We are working with multinationals and India is only a point of source, if you ask me. US market is continuously strong. In geographies, we see growth. We see sequential growth in all our existing customers. So, largely, the demand has been fine. Also, many industry leaders have mentioned, whenever there is recession, IT spending has gone up and offshoring has gone up. Now, inflation is also high, which makes it more efficient to go to a lower cost services provider. The impact of slowdown has reduced.

Can we say that spend on digital services will remain strong whether there is a slowdown or not?

For capex, there is no discretionary or non-discretionary spend. When it is capex and opex, people will continue to spend. When we talk to our customers, they are not cutting spend. When we talk our prospects, they are not cutting.

Supply issues in terms of talent is not subsiding for the Indian IT industry despite several interventions. When can we expect employee attrition numbers coming down? Is this change structural in nature?

Three-four factors come together simultaneously to create such a situation. Firstly, there is strong demand, and secondly digital initiatives are taken up at a fast pace. On the top of it, there is this remote working which make it easier for people to attend interviews and lastly, people have gone back to their native places and not willing to come back. All these factors have come together for this scenario. This is not structural. This is a temporary phenomenon which we are going through and we will see attrition coming down in couple of quarters. This will come down once we have a little bit of more alignment with demand and supply.

As far as utilisation is concerned, we will be more comfortable with an utilisation level of 77-78 per cent. We want 2-3 per cent leeway in managing the demand better. We will be more responsive to customers. So, we will hire people to have the pool always available for new demand.