New Gen AI unit, more verticals will accelerate our growth: Happiest Minds

Many mid-tier firms continue to navigate the current subdued demand environment efficiently. Through effective service offerings and operational improvement, these companies are showing a lot of resilience. Happiest Minds Technologies is one such mid-tier IT firm, which has been posting decent quarterly performance in the current financial year. In a conversation with the Bizz Buzz, Joseph Anantharaju, Executive Vice Chairman of Happiest Minds said that clients are taking time in deciding this year’s budget. But, there is a sense of India and Europe will perform better for the company in coming quarters, he said.

Happiest Minds has also set up a separate business unit in Generative AI space to cash in emerging opportunities in this space. The company is witnessing a lot of engagements with clients on the Gen AI space though deal conversion is taking time. He also said that the company is looking at creating new verticals for improving revenue growth. In order to build of capabilities in the key technology areas, Happiest Minds is open to acquisition in coming quarters. According to the company, operating margin is likely to be maintained with many levers supporting the uptrend

How do you summarise the third quarter earnings of Happiest Minds? Can you provide a brief overview?

We were able to do 11.5 per cent growth as opposed to the 12 per cent guidance. Quarter- on-quarter was a little muted at 0.8 per cent given the market softness. I think, it was a decent quarter. There are several reasons why the quarter-on-quarter growth number was a little lower than what we would have wanted. The obvious one was the number of working days we had just 60 days as opposed to the traditional 63 days. So, that shaved off some growth. We also had a higher leave loss during the December quarter. Thirdly, there were higher number of furloughs in some of our hi-tech and manufacturing customers. Despite all these factors, we were able to post good EBIDTA number. It was ahead of the guidance for the 15th straight quarter. We had given a guidance of 22 to 24 per cent and we were at 24.2 per cent. So, we continue to manage our profitability from an operational perspective. We have improved our employee utilisation level and there's still some headroom over there. Also, our attrition is down. So overall, things are moving in the right direction and quarter-on -quarter, we have been able to show progress.

What are your views on the current demand environment? What are you hearing from your clients?

This can be seen from industry and geographical perspectives. Firstly, on the geography, if you see, India is the second largest geography right now, which has grown quite well for us. Given the positive macroeconomic environment, we see a lot of potential in many industries and companies. We have a pretty decent Salesforce as well in India. As far as Europe is concerned, we feel that it is poised to turn a corner because they have been very cautious for two years. So, we should see some investments happening in Europe.

As far as budget is concerned, we didn't see the budget decisions and budget allocations being done in December. We have seen them getting pushed out into end of January and February. I think clients are trying to get more clarity. Our pipeline is actually good and we are watching closely, which of our initiatives get funded.

Do you face any kind of payment issues in the India business?

No. We've done a couple of things right from beginning like we make sure that we do it at decent rates and don't compromise on margins. Of course, we can't expect the same rates as what we get in the US but we don't do the deep rate cutting. We rely more on value proposition to get our customers. Secondly, we are careful about which customers we pick to ensure that we don't run into payment (issues). We really don’t have any payment problem in Indian business.

US business for most Indian IT firms had fared badly in 2023. Do you see any signs of improvement in the US?

It should be better. We are seeing pockets of weakness and we are also seeing continuation of spend in certain areas. We are focussing on areas where spend is being done. One of the areas that we feel quite bullish about is Generative AI. We feel good about the fact that we started a separate business unit for Gen AI and we have quite a bit of progress out there. We had around 30 customer conversations in Q3 out of which around six or seven have translated into projects. We expect that these will see implementations next year. We'll obviously continue engaging with more customers and prospects in Q4. As we enter next (fiscal) year, these engagements will close into either consulting exercises or POC's (proof of concepts) and then act as fuel for further growth. As far as giving revenue contribution from Gen AI is concerned, we don't plan to do that for this quarter. Next (fiscal) year onwards, we'll start doing that.

We have seen several cost takeout deals coming in the last three quarters. Has Happiest Minds participated in this space?

Yes. We participated in a few. For instance, with the one of our customers, where we had 50 per cent of the wallet share. We also engaged with two, three other customers at the beginning of this year to work with them for coming up with a model whereby we could take over the entire (work). So, yes we have couple of such deals.

You are able to maintain the margin profile despite subdued demand environment. Do you expect the margin to improve?

We are going to hold on to our guidance of 20 to 24 per cent for this fiscal year. There are many levers for improving margins though. Employee utilization could go up a little bit. Also, revenue growth would contribute to margin growth. Moreover, attrition is going down. We will also look at any investments required for both the verticalization and the generative AI business services because these are medium to long term engines of growth.

We have seen many companies acquiring capabilities in engineering services space as it remains a growth spot. Will you look at inorganic way of growth in coming quarters?

We do have good engineering services capability internally. We have our hardware team, which is of around 150 people. We have around 150 embedded engineers. We have already been helping several of our customers in the networking, industrial and manufacturing spaces. Having said that, if we get a good company with engineering skills, we will look at it. We are more focussed on building capabilities through such acquisition. We will also look at bridging any gap that may exist in terms of technologies or platforms. We are in talks with some firms in this regard and we may close some thing by end of this fiscal year or next year.