Venkatraman Narayanan, MD & CFO and Joseph Anantharaju, Executive Vice Chairman & CEO–Product Engineering Services, , in conversation with ETNOW.
Mr Ashok Soota, the founder of Happiest Minds, is looking to reorganise the structure of the company in terms of management changes. Can you just tell us what is happening in terms of reorganisation, if any?
Venkatraman Narayanan: Sure, there are two parts to it. There is an entire organisation structure change that Ashok has put in place. One is with respect to his holdings in the company and the other is with regards to the management of the company. I will take the first part which is the holdings of Mr Soota. He today along with the LLB holds about 52-53% in the company. There has been no change to that and he has created two trusts — one will be a holding trust and the other one is a philanthropical medical charitable trust which will focus on medical research. Almost all of the holdings of Mr Soota would go into these two trusts over a period of time. He has got certain trustees managing the trust and the voting of the shares that are held by the trust would be always in line with the management of Happiest Minds.
Now coming to the percentage holding, it is 53% right now and he has also remarked that at some point in time during subsequent acquisitions, dilutions, he does not look for that holding to go down to 35%. That is a futuristic statement keeping in mind requirements of the future. Mr Soota has done the whole restructuring to ensure that there is a clear transition of his holdings in a very smooth manner and to ensure support to the management of the company.
Coming to the company he talked about the EB structure (Executive Board structure) which currently constitutes three BU CEOs and myself — the MD and CFO. We work together as a single unit and we act as the CEO of the company. Each of us have functional responsibilities. Like Joseph is President of the PES business unit; Rajiv is President of the DBS Business Unit and Ram President of the Infrastructure Management and Security Services Business Unit. They have that responsibility which I would refer to as a functional responsibility just like mine. I have got finance on the corporate functions reporting to me. Four of us together are led by a common charter which is the EB objectives which is very closely aligned with the vision of the company.
When we come together as an executive board we work and function as the CEO and when we go back and disperse, we are back in our business units and lead charge in each of our functional areas.
Joseph Anantharaju: You know people would wonder what the Executive Board structure is because it is quite different. We function as the CEO of the company. In Germany, it is very common to have an Executive Board or Administrative Board which runs the company and we instituted this change around four years back. That has brought more alignment between the various business units and functions; better understanding for each one of us in different aspects of the company’s functioning; more empathy and better aligned corporate functions.
Tell us a bit more about the changes to the business units. How different are these units and what will be the reporting structure like?
Joseph Anantharaju: From inception, we have had three business units that is the Product Engineering Services business unit which looks more at platforms and products. We have the Digital Business services which helps companies with their digital transformation journey; and the infrastructure management and security which helps in helping the customers with their cloud migration, setting up their cloud infrastructure, managing these infrastructure and then various types of security services sector infrastructure and applications. The plan is to continue with these three business units as the go-to market and the source of all of the company’s revenues and they are supported by centres of excellence. We have the digital process automation centre of excellence, the IOT centre of excellence and the analytics and artificial intelligence centre of excellence. This is how we are structured.
Over the next two to three years, what sort of changes do you expect because of this?
Venkatraman Narayanan: In order to handle the question on growth and profitability, we have to take you a couple of years back. The EB structure was put in place in 2017-18. We have been functioning smoothly for the last two-and-a-half years. Within that period, the EB has been acting as a team and the CEO of the company has turned around the financials which is clearly visible right now because 2017 was a bad year and since then we have turned profitable. We have done a successful IPO. All of this has been under the leadership of the EB structure.
Looking at growth prospects, we have taken it upon ourselves that we will continue to grow on an organic basis at about 20% year over year and that is something that we have put out for the near term, short term and the medium to longer term.
While the EB structure has been in place and working, the BU has been delivering under respective individual objectives. Like I said the functional objective of each BU has its own growth targets, EBITDA targets, PBT targets and the three BUs plus the corporate rollup into the company financials. If the company has to deliver as a single unit, the EB has to deliver first under their respective BUs and then as a company as well.
The industry has seen strong demand. Accenture has reported a good set of numbers. They also hiked their guidance. Do you think that you are seeing even better traction now versus what you had mentioned during the third quarter numbers?
Joseph Anantharaju: What we are seeing is probably what you have seen in the industry. Demand seems to be strong across all of our digital capabilities. What is driving this is customers. In some of the industry verticals like edutech, hi-tech and media, in Q3 we saw an increase in demand and budgets opening up which bodes well for Q4. Once we came back from the holiday season in Q4 and somewhere in the second half of January, we suddenly saw a big increase in the number of projects getting green lighted and the spends opening up in few additional industries like manufacturing, logistics, industrial, energy and especially in the renewable space as well as retail.
Three factors are driving this: First of all, we had the political situation coming down. Post the vaccine launch, some of the doomsday scenarios did not come through. The Covid vaccine rollout is just gathering pace out here and the date by which all the adults will at least have one vaccine has been advanced from the end of summer to June to May. Now we are even looking at April, This is very positive.
More importantly, a lot of these industries have realised that what they were trying to do in terms of transformation over three -four years, the whole remote working and having less contact in your interactions — have led companies to realise that they need to accelerate their digital journey and we are seeing this increase in overall spend on digital initiatives.
We are again seeing that cutting across all geographies. We are seeing increase in both deals and closures and what is gratifying is seeing the traction in Europe and Middle East, geographies that we wanted to have specific focus on. In terms of services, the usual digital services around e-commerce, IoT, AI, security are the fields where we are seeing increased traction.
In our recent conversation you mentioned that company is looking for smaller acquisitions. Any progress on acquisitions and how would you be looking to fund that?
Venkatraman Narayanan: We have a very active deal pipeline as far as acquisitions are concerned. Bankers are showing us multiple companies across geographies, Until now, we have been 100% in the digital space and we do not want to dilute our positioning. Valuation expectations from the companies from the sell side bankers are quite high. Secondly, there is also a kind of rush for hiring or acquiring these companies from large companies and that is driving the valuations today.
We are very careful while looking at these names, talking to managements, sifting through what is best suited for us. We are looking at companies which we have said are in the range of $20-30-40 million in size, 100% digital, profitable and which has a culture which will blend in and which will go nicely with Happiest Minds.
We have seen very sharp margin expansion. The question is whether it can be sustained going ahead as there will be salary hikes from April 1 onwards. The economy is moving up and we could perhaps see some cost benefits receding. Could there be any changes to that margin band?
Venkatraman Narayanan: Not really. Stable sustainable margin band that I have been talking about has been 21-24% and we are looking at pay increases effective April 1. We have advanced the cycle by a quarter from what we would have normally done and we also shared a couple of days back with another publication that we are looking at giving double digit kind of percentage in terms of pay increases.
All of this will start showing up as cost increases for FY22 and we make up largely for that through volume increases. We are talking about a 20% targeted revenue growth on an organic basis and on to that, you need to bolt on what we have done as this acquisition which has been consummated in Q4 of this year. So all of that has to pay for the cost increases and some of the cost benefits that we saw during the Covid pandemic lockdown which has contributed to the margin expansion will obviously start reversing and which takes us back to the 21- 24% kind of sustainable margins. We are holding on to that as we look into FY22.