Many levers to sustain profitability in coming qtrs: Happiest Minds Tech

Happiest Minds Technologies reported another quarter of sound growth performance in the third quarter of ongoing fiscal. The company is confident of maintaining its growth momentum as we are on the verge of entering into the next fiscal. In a conversation with Bizz Buzz, company's Managing Director & CFO, Venkatraman Narayanan, and executive vice-chairman, Joseph Anantharaju said that demand environment remains robust and the IT firm is taking all measures to overcome the supply side challenges through aggressively hiring fresh engineering graduates and from finishing schools. The mid-tier IT firm is hopeful that attrition level is likely to come down in the fourth quarter. During the third quarter, the IT firm saw a decent rise in its operating margin and expects the margin level to be 22-24 per cent going ahead

Happiest Minds Technologies have posted good set of numbers in the third quarter. How confident are you in maintaining the momentum in coming quarters?

Venkatraman Narayanan (VN): This year is pretty much behind us. We are now looking into the next year for which the planning exercises are on and hopefully, expectations are that we will be able to replicate good growth numbers on the basis of the demand that we are seeing in the market. On the profitability front, we will like it to be 22-24 per cent band. Let's see how things play out in coming quarters because Covid was a nice joker in the pack. It helped us to get the margin numbers which we desired much quicker.

Most IT services firms are able to raise the pricing of contracts in recent quarters. Moreover, the offshore revenues of Happiest Minds are one of the highest in the industry. So, why doesn't the company call out the possibility of high operating margin?

(VN): We don't call it out because it (price hike) is a part of the normal process. You have an annual contract review. Given the demand scenario and the talent mix those clients asking for given the demand we request for it. It works well with the customer. So, it's not something that you have to call out. It's part of your normal operational process. It is one of the many levers that we have on profitability and growth front. There are other levers like utilisation, geographical mix, technology play, size of the project, and onsite-offshore mix.

Contribution of T&M (time and material) in Happiest Minds overall revenue remains high. Will you look at shifting it towards more fixed price contracts going ahead?

(VN): This is just a contracting structure. If it's a risk-reward model where we are developing a solution along with the client, I would see that as an outcome-based model irrespective of whether it is a contract model. All contracts we do, customers are looking for a solution.

Client mining and active customer additions are progressing well for the company. But, does high offshore component indicate that the company is not investing in developing near-shore centres in other geographies like Eastern Europe?

(VN): The journey of Happiest Minds started in India and we work in the India-US-Europe axis. Our agile model enables us to execute more project work from offshore locations. Now, if I'm saying is it the strategy of the company to be always 85 per cent offshore and 15 per cent on site, it is not so. It all depends on the customer. If I have a large customer tomorrow, for which I have to set up something established (in onsite locations), I would look at that.

Customers are more willing to outsource in Europe now. What are your investment plans in Europe?

(VN): Europe has been our geography of focus for very long time. If you look at it over the years, the share of Europe was high. It trailed off later. But, over the last 2-3 years, we have brought it back to the current 10 per cent level that you're looking at. We would like to take it up further. Interestingly, broader digital work is happening in the US and India. India is a step along with the US in digital adoption. Thanks to the digital ecosystem here. Traditionally, we started in India, we have a higher brand recall in India. So, we have some of our initial customers in India. Portability of the work, skill and technology that we are doing here is high for all clients across the US and Europe.

All industry players are now of the opinion that elevated attrition level is now stabilizing and we can see attrition coming down in coming quarters. What are your views on this aspect? Have you seen initial signs of stabilisation in the attrition front?

Joseph Anantharaju (JA): Supply side is an industry issue at this point of time. A lot of focus and effort within the company is going towards solving that issue. We have look at it in multiple ways. Firstly, we have to increase the freshers' intake and second how to make them deployable quickly. We have a good campus hiring this year. Freshers will be joining us in next six months. Also, we continue to hire from finishing schools, which have served us well. We work with finishing schools for specific skills and that number has increased.

Will we see the reflection of these steps on attrition numbers in the fourth quarter?

(JA): It should reflect in the next quarter as we increase hiring. As you've seen, we have added almost 800 people on net basis in year-to-date term and we just have to continue numbers at the similar pace to sustain our growth.

Can you give some view on the subcontractor expenses in recent quarters? Will it come down as you add more people in coming quarters?

(VN): Subcontractor expenses have picked from 9 per cent in the same quarter last year to 13 per cent in the immediate preceding quarter to 12 per cent right now. The number is likely to be 12-14 per cent range. It is more of a supply-demand situation.