Happiest Minds: Outlook On New Gen AI Segment | NDTV Profit
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00:00Hello and welcome to NDTV Profit. My name is Ruja Somaiya and today we are going to
00:04talk about Happiest Minds which reported its Q1 FY25 results. The numbers seem to be pretty
00:11weak. Revenue was up around 11%. While margin was a little bit of disappointment, while
00:17the street expected the margins to be at 18%, margins have come in at about 13.5%. Net profit
00:24is down about 29% to 51 crore. But to talk to us more about this, we are being joined
00:31by Mr. Venkatraman Narayanan, the MD and CFO, and Mr. Joseph Anant Raju, the Executive Vice
00:38Chairman and CEO of the Product and Digital Engineering Services at Happiest Minds.
00:43Welcome to the show, sir. Good morning.
00:47So what is your first take on the results this time? Pretty weak numbers, if we can read?
00:54Not really. In fact, let me give you a perspective. We have grown 17.8% in constant
01:02currency terms year over year. In rupee terms, that is an 18.7% growth. Our EBITDA, which is
01:10the measure of profitability, has grown 13.3% year over year. Sequentially, we have grown in
01:18dollar terms, 11.4%, and EBITDA has grown 7.38%. So if you look at it, it's an all-round growth.
01:26The declines that you're talking about are essentially below EBITDA lines, because
01:32the results include 2 acquisitions that we made during the last quarter, or during the quarter,
01:40which is pure software. 40 days of those results have been integrated into our results, and 38
01:46days of results of Aureus has also gotten integrated into our research. So this is quite
01:51an eventful quarter. And when you do such integrations and acquisitions, you have certain
01:58costs which come out of it. So there's a one-time cost of about 6.5 crores, which has hit our P&L.
02:04Unfortunately, like in the old days, you can't capitalize acquisition costs. You have to hit
02:09your P&L. And incidentally, we had a 13 crore one-time right back in the previous quarter. So
02:16if you look at it, a swing of almost 20 crores from Q4 of last year to Q1 of this year. And just
02:23for that, our profitability has remained pretty much stable, which is clearly shown out in the
02:31EBITDA numbers, 24.2 to 23.9, despite all of this happening. So you see, you have to shorn off all
02:40of these one-times and adjustments and non-cash charges which come out. We are pretty much in a
02:46good operating range right now. And again, comparing it with the industry, a 17% plus
02:53growth year over year is a brilliant performance. And we believe the headline to a press release is
03:00a great performance after our IPO. And we are set on our target of growth to reach that billion
03:06dollar vision by 2031. Many of the other metrics that my colleague will talk about will also
03:13substantiate what I'm saying. Just to give you a headline number, we have increased our million
03:19dollar customers from 48 to 58. Our average revenue per customer has moved from 780 to 840
03:26thousand dollars. Generative AI, which is the new BU that we started, is today contributing
03:32to one and a half percent of our total business. It's an investment business. We are investing into
03:36that, which has an impact on profitability. But we are calling it out separately,
03:42which most of us are not doing. And it's about one and a half percent of our business.
03:47And third and most final thing is we have entered into newer geographies of Asia Pacific,
03:53Mexico, Africa, some of it organic, some of it through the acquisitions that we have made.
03:58So it's taken us into all these geographies where we are able to penetrate deeper into our
04:05existing and the new set of customers. Finally, all verticals, if you see, except for manufacturing,
04:11has grown in both absolute terms and percentage terms, showing strong strength in the business
04:18that we are in. Right. OK, so one off is what led to the numbers going down. So do you expect
04:25this kind of one off from inorganic business to carry forward to second quarter as well?
04:31You won't have the one off, you know, the credit of 13 crores in the last quarter or the debit of
04:36six and a half crores in this quarter. So that should not come into our numbers in the next
04:43quarter. But that said, you know, acquisitions do come up with some of these accounting debits,
04:48like unwinding of interest costs or, you know, write off of intangibles. Looking at
04:55from a financial standpoint, these are non-cash charges, but we do we will have to take it.
05:00But the growth that comes from these, the growth that we show from these acquisitions should,
05:06you know, cover up for all of that over the next couple of quarters.
05:10Right. OK. OK, gentlemen, let me talk to you about the segmental change that has happened
05:17this kind of quarter. So from what my understanding tells me is that the digital business is being
05:23integrated into the product and engineering line, while we have introduced another line
05:28of generative AI. Is that correct? That's right. Yes.
05:34Sure. So can you tell us more about the digital bit and the traction in the generative AI,
05:40which you expect going ahead? Because you've introduced this new segment, which
05:45likely means that good traction is expected in this kind of segment.
05:50Yes. So as we had announced nine months back, you know, we had formed a generative AI business unit
05:57and it's off to a pretty flying start, if you ask me. We're very happy with the progress we've made.
06:05As Venkat pointed out, we have a team of around 100 people that are dedicated to this business
06:10unit. And we've trained around 75 percent of our happiest minds team on generative AI. And we plan
06:18to cover the rest in the next three months or so. In terms of conversations, we've had around
06:2355 conversations with customers. We've done 20 POCs thus far. And this spans both
06:34horizontal and vertical use cases. By horizontal, what I mean is use cases that cover horizontal
06:38processes that are applicable across industry groups. And there are some that are very specific
06:43to a vertical. Like, for instance, if you're using gen AI to figure out how the reporting
06:50to FDA should be done, how do you ensure that the documentation that you're providing has been
06:57valid? That would be very specific to a vertical. But there are others like customer service,
07:03field support, and things like that that cut across verticals. So we are seeing traction in
07:09both. And as I said, we have around 20 POCs that we've done. And the next step for us is to convert
07:17these into larger implementation projects. In terms of segmental outlook, I just wanted to
07:24clarify on the manufacturing number, which looks like a degrowth. And we do have a little bit of
07:32impact on a couple of projects that ended at the beginning of the quarter and that we are discussing
07:39with customers on the next phases. There are two accounts that got reclassified. Initially,
07:46the work was more on the manufacturing side. But then we realized that the subsequent work
07:51that we're doing orients them more towards high-tech and industrial. So we've reclassified
07:58that. But as such, we don't see much of a continuous impact in the manufacturing space.
08:06And we expect the numbers to, on a quarter-on-quarter basis, to start showing growth
08:12after having abstracted those two reclassifications that we've done.
08:17BFSI and healthcare have benefited by both organic growth as well as the acquisitions
08:23that we made. Both Aureus and PureSoft have... PureSoft has banking and financial services as
08:30its prime vertical, with healthcare being second largest. And Aureus has insurance as being the
08:40primary segment, with healthcare being the secondary segment. Both of these have seen
08:46a fair bit of growth. But across geos and verticals, if you look at an absolute basis,
08:52on a quarter-on-quarter, there's been a pretty good growth.
08:55Okay. Right. So manufacturing, what do you expect to revive in the coming quarters?
09:02As I said, a couple of accounts got reclassified, and that's why you see the
09:06degrowth. And you won't have that going forward. We are having a good pipeline out there. So I
09:12expect, on a quarter-on-quarter basis, for manufacturing too, to start showing growth
09:18from next quarter. Right. Okay. Moving on to the question,
09:23which largely all the IT companies are facing about clients cutting down on budget. So I see
09:28most of the revenue comes from the US for our company. So how are you looking at clients
09:34cutting down on their budget? And talking about generative AI in such a tight environment,
09:39do you expect them to actually spend into such deals which can translate into revenue?
09:46If you look at the demand environment, there are two, three things happening. While customers,
09:53it's not a secret, customers are being very careful with their budget.
09:56What we've observed is that there are still investments being made, and they're being made
10:01in areas that are a priority to the customer and which will deliver growth in the immediate terms.
10:07The strategic long-term outlook is second priority for many of the customers. If you just leave out
10:14the gen AI piece, I'll come to that in a minute. What we've been trying to do is to get a deeper
10:20read into customer priorities and to position our offerings accordingly to make sure that
10:25even if we don't get large deals, we're able to service the demand that customers have.
10:30Having said that, deal cycles are longer, just like some of our peers have shared in their
10:37outlook. Deal cycles are long, and therefore you've got to factor that into your projections,
10:43into your pipeline, and make sure that the top of the funnel is broader than it is to
10:49account for this factor. On the gen AI piece, I think that's where a lot of conversations are
10:54happening. Customers are looking at the productivity enhancement and additional revenues
11:01that they can get out of implementing this transformative technology. That's where the
11:0820 POCs that I talked about comes into play, where they're looking at how do we really use
11:12this technology? What is the benefit we're getting? Typically, they're taking the approach
11:18of doing a few use cases, releasing it to customers, or bouncing it off the first few
11:24or top few customers, and then fine-tuning and moving into an implementation phase.
11:31We hope or expect that in the second half of the year, many of these POCs will start translating
11:36into larger implementation projects. Right. Got that. No client deferrals, per se,
11:43you're looking at, right? As I mentioned, the two trends is customers taking a closer look at
11:51their budget and doing a prioritization exercise. Your ability to align to that prioritization
11:57exercise becomes very important then. That's where our whole restructuring, bringing the
12:04industry groups together, domain, sales, delivery, to work together and identify some of these trends
12:11and quickly align our capabilities is paying dividends. Secondly, we got to just factor in
12:18that the deal cycles will be a little longer and therefore need to have a much higher pipeline and
12:26a broader funnel than we would have had otherwise. Right. Thank you, Mr. Narayanan and Mr. Anant
12:33Raju. Because of crunch of time, we'll have to wrap up this conversation, but it was lovely
12:38speaking with you. So, Happiest Minds, pretty weak numbers, but due to one time and great
12:44traction on the healthcare segment, manufacturing likely to revive in the second quarter is what we
12:49have on Happiest Minds. But do stay tuned to NDTV Profit for more such updates.