We see uptick in demand for IT services as pandemic begins to recede

Ashok Soota-promoted mid-tier IT services company Happiest Minds has a complete digital focus and draws around 97 per cent of its revenues from digital services. The company, which is consistently performing well, sees demand uptick in the market as the pandemic begins to recede. In a conversation with the BizzBuzz, company's Managing Director and Chief Financial Officer, Venkatraman Narayanan said the mid-tier company focuses on specific segments with cutting edge technology solutions and it has bigger space to grow in coming years

We are seeing positive momentum. With 95 per cent of people working from India, we are witnessing receding fears about Covid. Largely, it is seen that people have learnt to live with it. Things are likely to be better on this front

Our operating margin is very close to large IT peers. In our EBITDA calculation, we also include the other income. Of course, we are better than mid-tier and small companies. We are always pointed out towards 21-23 per cent margin level

Happiest Minds has consistently performed well in recent quarters. How is the overall demand environment for the IT industry as many nations start vaccination against Covid?

Demand revival has happened, and you can see that in our growth numbers. Our dollar growth is high. What we are seeing is that there is a lot of pent-up demand. These are coming from our existing customers and from new customers what we call net new. So, there is pressure on us to start cracking on our hiring engine. We are seeing positive momentum. With 95 percent of people working from India, we are witnessing receding fears about Covid. Largely, it is seen that people have learnt to live with it. Things are likely to be better on this front. At the same time, we are seeing business flows getting better. In the domestic economy, many businesses are saying that demands are already at pre-Covid level. So, demand has picked up in most economies.

Happiest Minds has an operating margin level that is one of the highest in the industry. Do you think, such a margin level is sustainable?

Our operating margin is very close to the large IT peers. In our EBITDA (earnings before interest, taxes, depreciation, and amortisation) calculation, we also include the other income. Of course, we are better than the mid-tier and small companies. We are always pointed out towards 21-23 per cent margin level. However, there are some cost savings that become a habit and we don't want to give up on it. So, even when our employees are back, we will be careful about those costs which are being saved. That is the bottom line. People are not going to jumping on the plane immediately. So, travel cost is going to come back slowly. We see other two-three quarters in which 'work from home' is expected to continue. Also, the occupancy rate will vary. Some of these costs coming from travel, electricity, water may slowly come back. So, these will supplement the operating margin growth.

How much of these SG&A (selling, general & administrative expenses) are going to be structurally reduced?

Compared to the big IT firms, where the SG&A expenses could be around 7-8 percent (of total revenue), mid-tier firms operate at 3-4 percent more than this level. This is because of the huge scale of operations of big IT services firms. We are working on that percentage by percentage. That continues during the pandemic and we will make sure that we will not keep our eyes off that thing. Essentially, it is a question of scale. However, absolute numbers may go up for us as we will not hesitate to make investments on account development team.

In the last six months, IT biggies have cornered a big share of large contracts. Is it happening by elbowing out the mid-tier players? While the overall market size is not improving, are big players increasing their market share at the cost of smaller peers?

This is a theory that has been propounded for a long time that the big will grow and the small will die. Many of the time, it is a piece of play. We are a focussed digital player while big IT firms are legacy players apart from being a digital player. We are there because there is a need for a specific service, and we are meeting that requirement. So, that fact is whoever satisfies the customer will grow. The big players can't be everywhere, and they can't be everything for everybody. Enterprises are looking for the solution to their problems and are not looking for vendors. We follow a growth model of 'land and expand'. For example, we have built solutions for edtech players. So, any edtech player looking for a solution will obviously want to hear me out. That's why the vertical expertise matters along with the technology being used. IT companies usually market themselves based on case studies.

Is carving out of verticals in terms of specific segments like edtech or medtech a conscious decision?

When we started the company, we started as a horizontal player. But when we got clients working in the edtech segments and built expertise over a period of time on this segment. The genesis is to bring in cutting-edge technologies and develop a scalable solution. With time, these specialised segments become verticals.

How do you view the current attrition level of around 13 percent for the company?

Our attrition is fairly low as compared to the industry average. Our whole culture is happiest employees, happiest customers and that is why we have named our company as Happiest Minds. Attrition happens because of various reasons.

Do you feel the risk of client concentration like most mid-tier companies?

We don't think so. We have a good spread of clients. Also, client concentration has certain advantages such as the cost of sales comes down. The company is able to serve the client better. But at the same time, there is also a risk. There is no right number of what is client concentration. However, as compared to mid-tier peers, we are well-placed. Even a comparison with global IT services companies puts us in good stead.