The stock price of Happiest Minds Technologies has witnessed a huge rally for some time now. In FY22 so far, the stock has risen 167 per cent to ₹1,440. In an interview with BusinessLine , Venkatraman Narayanan, Managing Director & CFO, Happiest Minds Technologies, talks about how the decade-old IT services company has managed to survive the initial hiccups and the pandemic, and what the future holds for the company. Excerpts:

While other IT services companies have posted a higher profit, the first quarter for Happiest Minds has seen a decline in net profit by 29 per cent. What are the reasons for this?

On profits, I would like to draw your attention to our EBITDA numbers. As a percentage of total income, this has remained at 26 per cent and thereabout in current and previous quarters. As such, profitability has been maintained in percentage terms showing significant growth in line with our 40 per cent growth year over year. Now, when you look at our PBT, after adjusting for an exceptional cost, yes, there is a drop in terms of percentage to revenue and not in absolute numbers. The quarter has an exceptional cost of ₹6.1 crore on account of ‘fair valuing’ certain warrants in our subsidiary’s books. Happiest Minds, our subsidiary, had issued warrants to the seller of PGS Inc, an asset we had purchased last year. The liability for these warrants was recorded as such in the balance sheet basis a fair valuation. Accounting expects us to evaluate the performance of the acquired asset and evaluate the initial fair value accounting of the above warrants. Basis the performance of the acquired asset, and a recent fair valuation exercise, we saw an increase in the fair value of the warrants. Interestingly, while the initial accounting of liability permitted us to take it to the balance sheet, any subsequent changes must go through P&L as an exceptional item.

Coming to PAT, in Q1 FY21, we had a significant one-time credit of ₹18 crore arising on accounting for ‘deferred taxes’. However, in Q1 FY22, we have a normal Income-Tax expense of ₹15.46 crore. It is thus the base effect that has caused a drop in PAT in percentage to revenues. Adjusted for the exceptional cost and taxes, our profits continue to be healthy, both in percentage to revenue and absolute numbers, with the latter showing significant growth.

The company has witnessed unprecedented interest in its stock from investors. What does it indicate, and is it sustainable?

We today have an investor base of 4 lakh-plus, and this is a significant growth over the last 11 months. We are thankful to all those who believe in us. Coming to the share price, we do not comment on the same. We will continue to focus and deliver on our business fundamentals and strive to maintain the highest levels of corporate governance. Our positioning as a pure-play digital services player is helping us participate in the large market and growth opportunities seen in the market today.

With companies asking their employees to return to offices in a staggered manner, will digital revenues from the US and Europe decrease as clients look at reducing their investment in the digital footprint?

The need to become or adopt ‘digital’ as a business proposition stands independently and on a strong footing. The pandemic and consequent work from home have only hastened the process of digital adoption by enterprises. Businesses are starting out as digital-only companies or transforming themselves to be one. Education is becoming Edutech, Healthcare is becoming Healthtech, Finance is becoming Fintech. We believe that this change is here to stay.

Digital has assumed a commoditised identity. How do you plan to sustain your distinct digital identity?

As in the case of any tech, once it becomes all-pervasive, the expectation for it to become commoditised is only natural. However, I think we are quite far away from this happening. The shift we are seeing is fundamental and has only started to catch the pace. The tech that I talked about has been around for some time now, and it’s only in the recent past they have all started accelerating and achieving massive mass. We are seeing multiple sub-technologies, verticalised with forks happening in each. These are very focussed, nuanced and increasing in sophistication by the day. The digital journey also comes with itself the need to be in the forefront, which will thus always need the best talent and sophisticated service providers. This change is what I think will keep commoditisation away for some time.

Will the war on talent eventually take away the limelight from the accelerated growth witnessed in recent quarters?

This war for talent is a function of demand-supply dynamics, which is prevalent in the business ecosystem. The industry has seen many such phases in the past in 1997-98, 2006 and 2011. One must appreciate that the demand for talent is not just from service providers, but also companies that are starting out on a digital-only business. The supply situation is thus undergoing a shift for young say for a 2- to 6-year kind of experienced and ready to go kind of talent. The supply side is beginning to react and in a country like India with its demography, supply of engineers, young talent will learn to adjust to this very quickly. Yes, supply-side challenges will have some effect on growth and profitability. Companies will have to change, evolve and tackle this situation effectively, and here is where I say the past does hold some lessons for all of us.

Mid-tier IT services companies are performing better than the larger ones. Is it because the Mid-Tier ones are more agile and have no legacy issues to contend with?

In my view, the large companies who are all billions of dollars in revenue are doing a commendable job, especially given the base and the breadth of tech spanning traditional and digital business. Their traditional business is showing lower growth and, in some cases, de-growth, which needs to be overcome by them when talking about growth at a company level. In such an environment, pure-play digital-only, younger companies don’t have a base problem to deal with. This, coupled with the demand situation, is helping such agile companies take in a larger share of growth.

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