Why Happiest Minds halved its FY24 growth guidance

Happiest Minds reported a decent set of numbers in Q2FY24, although its profitability took a knock and fell 1.6 percent year on year to Rs 58.46 crore.

Happiest Minds was the latest IT company to lower its FY24 guidance this quarter, at a time when the larger macroeconomic climate has led to a subdued demand environment, with minimal discretionary spending.

The company, which had previously given a revenue growth guidance of 25 percent for FY24, which included both organic and inorganic, said on October 17, that its revenue guidance for the year is now 12 percent, and it will only be organic.

The acquisitions the company intended to complete by this point have been further pushed ahead.

Speaking to Moneycontrol on October 18, after announcing its Q2FY24 results, Happiest Minds Chief Financial Officer Venkatraman Narayanan said that the company had initially hoped to get 15-20 percent of revenue growth organically, and the rest from acquisitions.

Delays in acquisitions

“We have raised capital, we raised debt and we are ready to do that large acquisition, which was quite reasonably close, but it's delayed right now. To that extent, we had to come back and relook at the guidance. We looked at the organic growth that's happening in the company, what we are seeing from markets. If we do any acquisitions — we are hopeful of closing at least one in the next two quarters — that will be on top of this,” he said.

On the delay, in one instance, Narayanan said the company they were looking to acquire saw one of its key customers ramping down, which led to companies going back to the drawing board as valuation was impacted.

There have also been delays, thanks to the other companies in the fray for the same acquisitions. However, one positive effect from the delays has been that valuations are becoming more realistic. “At the same time, there is the risk of the people who were on the same sell mode earlier getting on to the wait mode,” he said.

Q2FY24 financial performance

Happiest Minds reported a decent set of numbers in Q2FY24, although its profitability took a knock and fell 1.6 percent year-on-year (YoY) to Rs 58.46 crore. Revenue jumped 14.4 percent YoY to Rs 406.6 crore.

Sequentially, profit was up 0.2 percent, and revenues were up 4 percent.

Guidance was lowered also because of the current market. According to Executive Vice Chairman Joseph Anantharaju, clients are breaking up spending and the company is seeing delayed closures.

“The pace at which some of these closures that we had, in terms of the discovery and consulting exercise that would translate into revenues — there's been quite a bit of a delay there that we hadn't seen earlier and didn’t anticipate,” he said. Additionally, its customers in some verticals, like in the edutech space, have also cut back on spends.

Also read: Happiest Minds down as Q2 net profit takes a knock

On profitability, Narayanan said that the company has honoured all the offers it made to campus joinees, paid out the variable pay, and also undertook wage increases of 8-9 percent for most employees. This led to a 3.2 percent impact on profitability, he said, adding it was largely made up by way of volume growth and value growth on revenue.

Generative AI

The company also announced that it was forming a Generative AI Business Services unit under its CTO. It also formed a new entity, Product Engineering Services (PDES), by combining its Product Engineering Services Business Units (PES) with its Digital Business Services Business Units (DBS), with this new vertical being headed by Anantharaju (who was previously heading the PES vertical).

While IT companies have focused on generative AI and offering solutions surrounding it to customers, the general consensus has been that revenue from it is still a little further down the road.

However, Anantharaju told Moneycontrol that they felt being ahead of the curve would help the company.

This is one of those once, maybe twice, in a generation kinds of technologies, which is extremely transformative and can have huge implications for IT services companies. We started building capabilities, looking at different domains, identifying use cases in each domain, building POCs [proof of concepts] that we could demonstrate to customers,” he said.

“Frankly, there is the huge potential, and, therefore, it behoves having an independent business unit. That's the reason why we thought we should have this as a separate business unit that would have the independence, flexibility and accountability to deliver incremental revenue and growth to the company,” he said.

The company says it would take a few more months to build out a full unit with delivery, sales and the like, and expects to have revenues flowing in from the unit starting next fiscal year.

However, by way of manpower, the company is primarily focusing on upskilling its existing talent to staff the unit.