Robust demand pickup in store as supply-side anomalies subside in next few qtrs: Happiest Minds Tech

Happiest Minds Technologies reported another bout of sound growth performance in the second quarter of ongoing fiscal. The company is confident of maintaining its growth momentum in the rest of this financial year. In a conversation with Bizz Buzz, company's managing director & CFO, Venkatraman Narayanan (VN), & executive vice-chairman, Joseph Anantharaju (JA), said that demand environment remains robust and the IT firm is taking all measures to overcome the supply side challenges faced by the Indian IT industry. It is aggressively hiring fresh engineering graduates and is hopeful that the supply side challenges will subside in the next three quarters as freshers onboarded would be deployed in projects. The company is also able to get some hike at the time of signing new deals from clients as customers are abreast of the cost pressures being faced by IT firms in terms of wage cost. The management also said that there is a lot of stability in the revenue flow given the repeat business percentage and the stickiness of customers

We are just seeing customers putting in their budgets. So, in a month's time, we will have a better picture. There are two ways to look at demand. First is the pent-up demand, which customers wanted to implement in 2020, but that pushed back to this year. Second is the demand arising due to the pandemic in which customers are looking at how their users are adopting digital interfaces, what role technology can play. This demand (second one) will continue for some time. We are mostly doing digital and this will keep coming in

The IT firm is taking all measures to overcome the supply side challenges faced by the Indian IT industry. It is aggressively hiring fresh engineering graduates and is hopeful that the supply side challenges will subside in the next three quarters as freshers onboarded would be deployed in projects. The company is also able to get some hike at the time of signing new deals from clients as customers are abreast of the cost pressures being faced by IT firms in terms of wage cost

What is your outlook on the demand sustainability? Will the current demand environment continue beyond FY22?

JA: We are talking to various customers and my sense is that demand is going to stay for another nine to 12 months given the spending pattern and the initiatives that customers have been coming up with. A good indicator of that the kind of budget that gets approved for the next year. We are just seeing customers putting in their budgets. So, in a month's time, we will have a better picture. There are two ways to look at demand. First is the pent-up demand, which customers wanted to implement in 2020, but that pushed back to this year. Second is the demand arising due to the pandemic in which customers are looking at how their users are adopting digital interfaces, what role technology can play. This demand (second one) will continue for some time. We are mostly doing digital and this will keep coming in.

We see the cost takeout mega deals are drying up in the market place. What is your sense on those mega deals? Does Happiest Minds Technologies participate in such kind of deals?

JA: We have participated in couple of large cost-takeout deals. As you can see from our factsheet that we have around 50 of Fortune-1000 companies and quite a few of them are Fortune-100 companies. What we are seeing is many of them are looking at multiple set of vendors depending upon the capabilities. They are not looking at betting on their entire initiative on one vendor.

What is your outlook on revenue growth for the second half of this fiscal year?

We have a 45 per cent revenue growth in year-on-year term. That should be the trend for the rest of the year. Going forward, there will be some bit of base effect. But we will be able to maintain the trend for rest of FY22. We are looking at a long-term revenue growth trend of 20 per cent with an operating margin of around 20-24 per cent.

Operating margins have dropped a bit on sequential term. Was there any one-off accounted for during July-September quarter?

VN: This was because we allocated Rs1.4 crore for the beneficiaries of those Happiest Minds who passed away during the pandemic. We have taken the entire cost in one quarter. If you adjust this number, we are back to 26-26.3 per cent kind of margin band. One shouldn't be worried on these things because the market is buoyant from demand standpoint and also from supply standpoint. Because when we hire somebody at a certain wage, we discuss this with our client so that some of the cost can be passed on. So, half a per cent or one per cent shouldn't be looked into because the trend is healthy. The wage cost is staying constant, which is a good thing. There has been some spike which we are meeting with the help of subcontractors. There are a lot of levers. You have got rates, geography, utilization, vertical, technology, employee pyramid among others.

When do you see supply side issues in terms of talent stabilizing? Will it happen in next two-three quarters?

JA: We are considering three quarters when the next campus batch comes in. Some of the freshers have come on board both from campus and off-campus. All those freshers who have come on board, should also be productive by then. So the situation should be much better.

VN: In calendar year 2021, we have brought in more people through off campus route, which is more than 280 freshers so far. We have started the campus programme where the numbers will be higher.

How is the pricing environment now? Are you able to pass on some of the cost to customers?

VN: We are in discussions with our customers and are able to make them see the whole aspect. Many of our customers also have their Global Development Centres here and know about the business environment in terms of cost.

JA: What we are doing is that for new logos, we have effected an increase in the rate card which is somewhere in the mid-single digit. For existing customers, who comprise around 90 per cent of our business, the rate escalation clause is built into the contract. For others, we are in the process of discussing with clients. Customers are receptive about the supply-side challenges.

What is the average tenure of the deal and what is the percentage of renewal in the total contract value?

Duration of customers staying with us is very large. Our repeat business is around 87 per cent of the total business. The top client is with us more than seven years. Average size per customer, the number of new customers, growth in number of million dollar customers, all these factors give stability to our revenue.