Happiest Minds Technologies Limited (HAPPSTMNDS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Happiest Minds Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Aditi Patil from ICICI Securities. Thank you, and over to you, Ms. Patil.

Good morning, ladies and gentlemen. Thank you for joining us today on the Q2 FY '27 Earnings Call of Happiest Minds Technologies Limited. On behalf of ICICI Securities, I would like to thank the management of Happiest Minds for giving us the opportunity to host this call. Today, we have with us Mr. Joseph Anantharaju, Co-Chairman and CEO; Mr. Venkatraman Narayanan, Managing Director; Mr. Ram Mohan, CEO, Infrastructure Management and Security Services; Mr. Sridhar Mantha, CEO, Generative AI Business Services; Mr. Praveen Darshankar, Company Secretary and Compliance Officer; Mr. Anand Balakrishnan, CFO; Mrs. Priyanka Sharma, Head, Investor Relations. I will now hand it over to Priyanka Sharma for the safe harbor statement and to take the proceedings forward. Thank you. Over to you, Priyanka.

Thank you so much, Aditi. Good morning to all the participants on the call, and welcome to the conference call to discuss the financial results for the second quarter and half year ended September 2026. I am Priyanka Sharma, Head of Investor Relations. We hope you have had an opportunity to review the earnings release issued yesterday. Now, let me quickly walk you through the agenda for today's call. Joseph will begin by sharing his perspectives on the business environment, our strategic priorities and overall business performance. Sridhar will then touch upon AI-led transformation initiatives and progress around AI-led engagements and capabilities. Thereafter, Venkat will take you through the financial and operational performance for the third quarter and followed by our outlook for 2027. Following the management commentary, we will open the floor for questions. Before we begin, let me read the safe harbor statement. During this call, we may make forward-looking statements. These statements reflect the environment we see as of today and involve risks and uncertainties [Audio Gap] actual results to differ materially. We do not undertake any obligation to update these statements periodically. With that, let me now hand it over to Joseph. Joseph, over to you.

Thanks, Priyanka. Good morning, everyone, and thank you for joining us to discuss Happiest Minds Technologies' financial results for the second quarter and first half of FY '27. We delivered another quarter of healthy growth and improved operating performance. Revenue stood at INR 645 crores, growing 12.5% year-on-year in rupee terms. Operating profit grew 22.5% year-on-year, with margins improving to 18.5%. This performance reflects the resilience of our business, the strength of our customer relationships and our continued focus on profitable growth in a selective demand environment. Venkat will get into more details on our financial and operation performance. Q2 also has been an important quarter in our strategic journey, as mentioned earlier, following the announcement of our proposed combination with ITC Infotech on August 31. We believe this combination presents a significant opportunity to create a scaled AI-first global technology services enterprise by bringing together highly complementary capabilities. Happiest Minds' strengths in AI, digital engineering, data, cloud, cybersecurity and product engineering complement ITC Infotech's expertise in enterprise transformation, SAP, PLM, Industry 4.0 and industry-specific solutions. Upon completion, the combined enterprise is expected to be better positioned to pursue larger transformation opportunities, deepen customer relationships and compete more effectively across global markets with an aspiration to achieve USD 1 billion in annual revenue by FY '28. The proposed combination is progressing through the necessary approval processes. In the meantime, both organizations continue to operate independently with an unwavering focus on customers, delivery and business execution. Let me now turn to the demand environment. Enterprise technology spending remains selective with clients prioritizing investments that deliver clear and measurable business outcomes, especially in the near to medium term. We continue to see more opportunities across AI, modernization, data and cybersecurity with AI increasingly moving from experimentation towards enterprise-scale adoption. For Happiest Minds, this creates a significant opportunity at the intersection of AI and digital engineering. Customers are looking to improve engineering productivity while modernizing legacy technology estates and addressing technical debts. These shifts are also fundamentally changing the economics of technology delivery and shaping how we think about our own business model. As part of our AI-first, agile always strategy, we have initiated Project Reimagine, an important strategic program focused on transforming how we skill and hire our people, execute on customer projects and capture customer value in an AI-native world. At its core, Project Reimagine is about moving beyond traditional project delivery towards customer value engineering, where AI becomes not just a productivity tool, but a value multiplier. It represents a shift from predominantly effort-based delivery towards more outcome-driven engagements with greater emphasis on the business and technology value we create for our customers. We believe this evolution is critical to our future growth. As AI reshapes technology delivery, our opportunity is not simply to improve productivity, but to build a more differentiated, scalable and value-oriented business that strengthens customer relationships and positions us for sustained growth. We are also making encouraging progress in translating our AI capabilities into customer adoption and commercial opportunities. An important enabler of this transformation is Rel(AI)Build, our AI-powered software engineering platform designed to embed and ease the adoption of Agentic AI across the software development life cycle while enhancing engineering productivity and accelerating modernization. We are seeing encouraging traction with around 15 existing customers adopting Rel(AI)Build across our engineering use cases. Beyond software engineering, we are extending our AI capabilities into repeatable industry-focused solutions. EduWeave, our AI solution targeted at universities, is generating encouraging interest across Southeast Asia, the Middle East and India as educational institutions explore AI-led transformation. We are developing a growing pipeline across multiple institutions with opportunities spanning academic, administrative and student-facing processes. Together with solutions such as Arttha and Insurance in a Box, these investments in platforms, reusable solutions and intellectual property are intended to strengthen our differentiation and enable more strategic, longer-term customer relationships. Sridhar will share further perspectives on our AI progress and how these capabilities are translating into customer and delivery outcomes. Alongside our investments in AI and engineering capabilities, we are also seeing encouraging momentum in our focused go-to-market initiatives. In the GCC space, enterprises are increasingly looking beyond traditional delivery-centric models and view GCCs as hubs for technology transformation, innovation and AI adoption. We have strengthened our AI-first GCC as a Service proposition across setup, scale-up and transformation. During the quarter, we secured a multimillion dollar BOTAT, which is Build, Operate, Transform, Agentify and Transfer engagement with a global digital asset management company. Our private equity ecosystem initiative provides another strategic avenue to engage PE firms and their portfolio companies, supporting their technology modernization, operational transformation and value creation priorities. Together, our GCC and PE initiatives represent important growth avenues, enabling us to engage customers earlier in their transformation journeys and progressively expand relationships across AI, engineering and enterprise technology services. Turning to our customer franchise. We continued to strengthen our relationships during the quarter. We ended Q2 with 311 active customers and now serve 95 billion-dollar corporations, up from 92 in Q1. Repeat business increased to 95.1%, reflecting the strength of our relationships and the continued confidence customers place in Happiest Minds. We are particularly encouraged by the nature of the engagements we are winning, with an increased focus on transformation-led, engineering-intensive and longer-term relationships. I've already spoken about our significant GCC win. Let me briefly highlight a few other notable engagements during the quarter. A leading Indian commercial vehicle manufacturer selected us to support its next-generation connected vehicle platform and software-defined vehicle journey. With a global electronics distributor, we secured a cloud engineering engagement covering Azure administration, infrastructure automation, networking and observability. And for a U.S. skin care, beauty and personal care manufacturer, we secured a multiyear IT managed services engagement. These wins reflect the breadth of our capabilities and our ability to address increasingly strategic technology and transformation priorities for customers. From an industry perspective, BFSI remained the largest vertical contributing approximately 28% of revenues. We also saw encouraging sequential momentum in retail and CPG, high tech and industrial, while health care and EdTech continue to be an important part of our portfolio. Geographically, the Americas remained the largest market, contributing approximately 56% of revenues. APAC delivered healthy sequential growth of approximately 10%, increasing its contribution to 9%, while India contributed 18%. Cybersecurity remains another important area of opportunity as enterprise technology environments become increasingly cloud, data and AI-driven. We continue to secure engagements across threat intelligence, security operations, vulnerability management, identity and access management and managed security services. We are also strengthening our AI-led cybersecurity capabilities through SecAIGenie and our AI governance offerings, complemented by a collaboration with EC-Council. As AI adoption scales, we believe security, governance and resilience will become increasingly integral to enterprise transformation, creating further opportunities for our cybersecurity practice. Looking ahead, while the macro environment remains mixed, we remain encouraged by the structural growth opportunity across AI, digital engineering, modernization, cloud and cybersecurity. Our focus is on driving measurable customer value and profitable growth by strengthening our capabilities, evolving our delivery model through Project Reimagine and scaling differentiated AI-led solutions and go-to-market initiatives. Together with the opportunities presented by our proposed combination with ITC Infotech, we believe these initiatives position us to build a more competitive, scalable and future-ready enterprise, creating sustainable long-term value for our customers, people and shareholders. With that, I'll hand over to Sridhar to elaborate on how we are translating our AI-first strategy into execution and tangible customer outcomes. Sridhar, over to you.

Thank you, Joseph and good morning, everyone. Joseph has spoken about the growing importance of AI in enterprise transformation and how we are positioning Happiest Minds to capture that opportunity. I'll focus on how we are translating this strategy into engineering capabilities, reusable platforms and tangible customer outcomes. Our AI spending continues to be centered around 3 priorities: making AI native to solution design, embedding AI across engineering and delivery and building the platforms, skills and governance necessary to scale enterprise AI adoption. Let me start with the solution design. The multimillion-dollar BOTAT deal Joseph talked about has interesting AI productivity elements as key outcomes that helped us secure the deal. We committed a certain AI productivity percentage as part of transformation by agentifying the entire SDLC process by FY '28. [ Audio Gap ] talked about helps us to gain higher AI productivity than using agents with foundation models. This allowed us to make more aggressive bids than competition on fixed-bid deals. In Q2, we secured a deal with an Indian steel manufacturing company to build a unified digital planning and execution platform that could transform the entire production planning from reactive process into a structured, transparent and AI-enabled. AI is also allowing us to solve the kind of problems that were not possible in the past. We delivered an end-to-end test automation for a warehousing platform. There's no product documentation or details of the manual test cases were available. In the past, doing such projects would have been near impossible or would have taken extremely long time. However, with the help of AI, we are able to successfully create a complete set of automation test cases. Joseph talked also about various industry-specific AI solutions like EduWeave, Insurance in a Box, et cetera. Our enterprise AI platform provides a collection of modular, secure and model-agnostic solutions that enable customers to move beyond isolated [ AI ] use cases towards broader enterprise implementations. The objective is to give customers the flexibility to bring together different AI models, enterprise data and use cases very specific to their vertical or industry area within a governed architecture for specific problem areas rather than building each solution separately. As AI adoption matures, we are also seeing growth interest in Agentic AI significantly, where intelligent agents can support and orchestrate more complex business and technology workflows. Our investments in reusable agents, accelerators, enterprise AI frameworks and reusable solutions are intended to help customers adopt these capabilities with the flexibility, security and governance expected in enterprise environments. The second priority for us is engineering and delivery. Today, 55% of all our projects are being delivered with AI-enabled delivery and 72% of our developers and testers are now using advanced AI tools in delivering the projects to our customers. And both these numbers will continue to grow with time very rapidly with all the training and skill development programs we have in place. Our AI service delivery platform, Rel(AI)Build, is designed to enable human engineers and AI agents to work together across the entire software development life cycle. And using Rel(AI)Build as well as the foundation models and agentic frameworks, we are embedding AI across coding, testing, documentation, application modernization and quality engineering with the objective of improving engineering productivity, quality and delivery speed. Importantly, our approach combines automation with established engineering controls and human oversight so that productivity gains are achieved without compromising quality or security. This is where we believe AI can fundamentally change the engineering model. It is not only about automating the individual tasks across the SDLC or our service delivery, but increasingly about redesigning the entire service delivery workflows around collaboration between engineers and the intelligent AI agents. Our third priority is scaling what works for us with AI. We are seeing generative AI and Agentic AI use cases progress towards live repeatable solutions. This transition is important because reusable solutions can reduce implementation effort, accelerate the deployment and allow us to apply proven capabilities across multiple customer environments. We are also encouraged by the momentum in our generative AI business services unit, which delivered approximately 135% year-on-year growth in constant currency terms in the first half of FY '27. While this business is scaling from a relatively smaller base, the generative AI services business unit, the growth reflects increasing customer adoption of AI use cases and AI-native solutions. We are seeing these capabilities come together across our customer engagements, both implementing native AI architectures using the AI productivity tools and AI use cases. And we also combine this with the digital engineering, data, cloud and enterprise platforms to address industry-specific requirements, whether in modernizing the applications, transforming engineering environments or improving operational processes. This ability to bring together AI with our broader engineering capabilities is important because customers are increasingly looking for solutions that can move from experimentation into their core technology and business environments. Of course, responsibility remains central to this journey that we are taking our customers through. As adoption scales, security, data governance, model reliability and human oversight becoming increasingly important. We are therefore building these considerations for platforms and delivery approach rather than treating them as separate requirements. Going forward, our focus is clear, industrialize what works, strengthen our reusable intellectual property, expand adoption across customer environments and translate AI capabilities into measurable business and delivery outcomes. We believe the combination of our engineering heritage, AI platforms that we built and continue to build, reusable solutions and increasingly AI-enabled talent base will be an important differentiator as enterprises are moving from experimenting with AI to scaling it across their businesses. With that, let me hand over to Venkat to take you through our financial and operational performance. Venkat, over to you.

Thank you, Sridhar. Good morning, everyone. I'll now take you through our financial and operational performance for Q2 and H1, followed by a brief update on ITC Infotech's performance and the proposed combination. We have had a good quarter with healthy revenue growth and an improvement in profitability. Operating revenues for the quarter stood at INR 645 crores, representing sequential growth of 2.7% and year-over-year growth of 12.5% in rupee terms. In constant currency terms, revenue grew 2.4% sequentially and 6.8% year-over-year. For the first half of FY '27, revenue stood at approximately INR 1,274 crores, reflecting a growth of 13.4% year-over-year in rupee terms and about 6.8% in constant currency. Total income for the quarter stood at INR 665 crores, growing 2.1% sequentially and about 12% year-over-year. Turning to profitability. Q2 operating profits stood at INR 119 crores, growing 9.6% sequentially and 22.4% on a year-over-year basis. Operating margins have improved by 100 basis points sequentially to about 18.5% compared with 17.5% in Q1. This has been supported by improved utilization, operating efficiencies and continuing cost discipline. Adjusted profit after tax stood at about INR 79.1 crores with adjusted EPS showing INR 5.25 for the quarter. For the first half of the year, operating profit stood at INR 228 crores, while adjusted profit after tax was INR 159 crores and adjusted EPS coming in at about INR 10.60 per share of face value INR 2. Our focus continues to be on balancing growth, profitability and investments in capabilities that support long-term competitiveness. On capital efficiency, ROCE stands at about 24%, while ROE was at about 14.7%, consistent with the previous quarters. We ended the quarter with cash and cash equivalents of about INR 1,716 crores, maintaining a strong balance sheet to support our operating and strategic priorities. Moving to some of the key operating metrics. We ended the quarter with about 311 active customers. Our large enterprise customer relationships continue to strengthen with 95 billion-dollar corporations contributing to almost 60% of our revenues. Repeat business increased to 95.1%, while IP-led revenues improved to 10.5% from 9.3% in the last quarter. On people, we ended the quarter with 6,466 Happiest Minds. Utilization improved to 81.8% from 81% in Q1, while voluntary attrition improved to 14.3% from 15.4% in the earlier quarter. These healthy trends reflect our continued focus on delivery efficiency, workforce stability and prudent people management. Our DSO stood at 101 days compared with 92 in the previous quarter. The drop was largely on account of migrations from Aureus and PureSoftware integration or merger and resulting delays. Improving this will be our priority in the ongoing quarter. Considering our performance and the progressive dividend policy of the company, our Board has declared an interim dividend of INR 3.05 per equity share of face value INR2. November 6, 2026 will be the record date for the same. Coming to ITC and ITC Infotech. ITC Limited declared their financial results yesterday and their results incorporate the performance of ITC Infotech as well. They have posted on their website a very nice data sheet, or rather investor deck, like what we have been sharing, to ensure that stakeholders can assess their performance and visualize how Happiest Minds plus ITC Infotech will look when consolidated or merged. I'm talking about ITC Infotech. And on their investor page, they have put out a nice investor presentation. ITC Infotech also had a strong quarter with second quarter coming in at about 18.5% year-over-year growth and the first half showing 17.4% growth in rupee terms. Adjusted EBITDA margins remained healthy at 18.4% for both the quarter and the first half. We are encouraged by the continued momentum in the business, particularly in cloud, data and AI. That's what we read about from ITC Infotech. Please do go through the website of ITC Infotech for the complete presentation and the numbers. As for the merger process itself, we are also making steady progress on the proposed combination and we remain broadly on track with the time lines we had indicated. In our presentation, the investor presentation, we have the last slide detailing out the various steps and the time line with respect to the merger and where we are on completion. Happy to say that we are on track and -- if everything goes -- continues in the same way, we should be a merged company by October, November of next year. The merger, of course, remains subject to necessary approvals, which are being pursued in earnest by both companies. As we enter the second half of the year, our focus remains on sustaining growth, protecting profitability and maintaining disciplined capital allocation while continuing to invest in the capabilities that will shape our future growth. I would like to thank all our stakeholders and [ every Happiest Minds ] for their continued trust and support in us. Thank you for joining us today. We'll now be taking -- we'll be now happy to take your questions.

The first question comes from the line of Aditi Patil with ICICI Securities.

My first question is on our U.S. market. So the U.S. market revenue run rate has remained flattish between $38 million to $39 million per quarter for the last 6 quarters. So can you share like the -- I mean, what are the tailwinds and headwinds over here? And what steps are we taking to revive growth in the U.S. market? My second question is on the IMSS business. We saw a very sharp sequential growth in this segment. So is this driven by recurring annuity type work or project-based work? And can you share roughly how much exposure do we have to cybersecurity services within this -- within the IMSS service segment? And the third one is on what led to strong growth in the IP-led revenue. Yes.

Okay. Sure. Thanks, Aditi, for your questions. If you see our U.S. geo revenues grew by 0.9% during the quarter. And given that it's -- U.S. geo is the largest geo, 60% of our revenues comes from U.S., it kind of aligns or correlates to our overall performance. In this case, I think the APAC geo showed a much stronger growth. In terms of the ups and downs of U.S. geo, what has positively impacted and what has been a little bit of a drag, right? I think our -- and then bookings have been a positive in the U.S. geo. As you know, we divided our sales team into NN and EN 1.5 years back. And I think in -- especially in U.S. because we focus more on U.S., we've seen good traction out there. A couple of the large wins that we've had, one of them has reflected in both IMSS and high-tech growth and another one will reflect in Q3 and going forward. They've come from U.S. geo NN logos. I think what has been a little bit of a drag has been the -- that most of our EdTech revenues come from, I would say, 90% of our EdTech revenues come from U.S. And the U.S. EdTech market has been going through its challenges. We've discussed this in the last couple of calls. We're trying to address it in multiple ways by looking at the university segment. We're looking at our own EduWeave offerings, where we focused it more around Middle East, India and Southeast Asia. So that won't solve the U.S. -- the challenge in U.S., but it'll at least address some of the challenges that the EdTech market is facing. So I would say that then there have been a couple of customers where either we've completed projects or they've run out of funding that have resulted in the high-tech space, that have resulted in the muted performance in the U.S. market. I'll take a look at -- I'll give you a little bit of a view on IMSS and let Ram get into more details. As you had rightly pointed out, we had a sharp sequential growth in IMSS. Quite a bit of it is security driven because you're looking at customers increasing their spend and focus on security. We also had a little bit of right shifting of revenues from Q1 to Q2 that have bumped up the growth. But I will let Ram talk more about the nature of the IMSS growth and performance in Q2. So Ram, over to you.

Thanks, Joseph. Aditi, what has happened that led to the sharp growth is we have won a few deals which are annuity-based deals, specifically in the U.S. We have had 3 or 4 good annuity-based business and also one large deal in Middle East from a conglomerate and also one large deal from a large bank in India. So with all these things, there is a significant increase in terms of the revenues from quarter 1 to quarter 2. The second important thing is our platform, ELLIPSE, which is an AI-driven platform, which monitors and manages the infrastructure, has been accepted by our customers as one of the good platform to monitor the entire IT infrastructure. So we have now -- we are having about 21 customers onboarded on this particular platform. And as Joseph mentioned, we are also seeing a significant increase in terms of our security opportunities, both adjacent opportunities within the same customers and also new opportunities. Almost 40% of our IMSS business comes from security. A new AI-based security services called SecAIGenie is also looking very promising and the customers are very interested in this particular productized service and that is also gaining a good traction in the industry. So all this put together have given a good boost to IMSS business. And what is heartening is majority of them are annuity-based business.

And just to continue, this SecAIGenie and ELLIPSE increase is also contributing to the increase in IP-led revenues, which was your third question, Aditi.

Okay. So ELLIPSE and SecGenie AI, I mean, has that been increasing over the last few quarters? Or this quarter, we have seen a major increase in that? And like can you help me understand the deal sizes and margins over here?

So Aditi, there's also one more factor at play out here, right? It's the Rel(AI)Build framework that we have. As I mentioned in my talk, it's an internal framework that -- or harness that we built for enabling and catalyzing Agentic AI adoption. And we've seen quite a few customers, I did mention 15 customers who adopted this. So that also has contributed to the increase in IP-led revenues, Aditi.

Okay. Got it. I have a couple of other questions. So my next question is on -- like, have we set up any like revised incentive structure or retention structure for key talent going into the merger?

So, Aditi, we have earlier this -- last year and earlier this year, we've instituted an ESOP scheme for our top talent. And we will be doing something similar next year as well. And we will do this in consultation with at least, I think, ITC Infotech. I know we are in a standstill period. But we believe that this ESOP scheme that we have will incentivize our key leaders on performance and also help retain them.

Okay. Got it. And one more on margins. So if we look at the service line-wise segmental margins, there has been a good improvement in those. But if we look at overall margins, EBITDA margins, they have remained flattish, maybe because there is a higher unallocable other expense component. Can you explain what comprises this unallocable other expenses?

Here, I would like to point out the financials at the consolidated basis, which is operating margin has improved from 17.5% to 18.5%. That's at the company level. The unallocable is typically the corporate costs. Till allocation is done till gross margins. We are one of the very few odd trees which declare gross margins. We show splits only till gross margin in the segment. After that, most of the costs are shown as unallocable. But if you want to see the margins at the company level, operating margins is what you see. You look at that's moved from 17.5% to 18.5%, largely thanks to all the IP-led business that we are talking about, which is slightly at a slightly higher margin. Second is improved utilization, which is, I think, at an all-time high or close to an all-time high in the last 5, 6 quarters of 81.8%.

[Operator Instructions] Next question comes from the line of [ Sujit ], an individual investor.

Sir, Joseph, you -- I mean whoever that [indiscernible]. I was not there from the initial beginning. I want to know this merger is going on. It's fine. I'm not -- yes, it's okay. I just want to know if this is an offline deal or online deal. Why I am saying this, when the merger happened on September, so the shareholding is still now showing that exact as before. So I am not sure because ITC already took -- in that merger sheet, it was 22. So I was thinking whether that deal is later executed after, that is on November, that the shareholding pattern will come down. Or what I mean to say, the November part in the next year, or is it now? Because 22 points that whatever that ITC has taken -- ITC Infotech has taken, that is not shown in the September one. That is what I'm in Happiest Minds.

Yes. So see, the merger is happening in steps, which is you need the approvals, after which we go approach the NCLT for merger. So that's one track which is happening. The other track, there is a separate share transaction between the promoter and ITC. So these are 2 separate transactions and how that happens. So that's an SPA between ITC Infotech and Mr. Soota for which post the CCI approval, there will be a tranche 1 transfer of 11%. And then post shareholder approval in February, March, whenever that happens, there is another 11% that happens. So these are 2 separate tracks of transaction. One is a merger transaction, the other is a transaction between the parties, which is ITC Infotech and Ashok Soota in terms of a share transfer.