Happiest Minds Technologies Ltd
NSE:HAPPSTMNDS
Earnings Call Analysis
Q2-2024 Analysis
Happiest Minds Technologies Ltd
The company reported a solid growth of 21%, showcasing resilience in its operational performance. This robust growth narrative is bolstered by the company's impressive cash conversion rate, with free cash flows representing nearly 98% of EBITDA. Cash reserves are healthy, marked by INR 1,300 crores of cash and cash equivalents, part of which comes from successful capital-raise activities including a Qualified Institutional Placement (QIP) and market issuance.
Operational efficiency saw an uptick with the improvement in utilization rates from 74.5% to 76%. Talent attrition also improved significantly, landing at 14.4% from a high of 23.5% a year ago. These figures indicate not only effective resource utilization but also a stabilizing workforce, crucial for sustaining growth and service quality levels.
The company has managed to acquire 7 new logos, including several large Fortune 500 enterprises, evidence of their strengthening value proposition. Alongside this, there's a clear strategy focused on 'land and expand,' as shown by the increase in the average revenue per customer and a growing cohort of $10 million and $5 million customers.
Demonstrating a commitment to shareholder returns, the company declared an interim dividend of INR 2.50 per equity share. This move is indicative of the company's financial health and its confidence in sustaining profitability.
The company is facing slower decision-making processes from clients due to macroeconomic and geopolitical uncertainties. It's leading to prudence in customer spending and is impacting the velocity of revenue generation, suggesting potential near-term headwinds for growth.
Despite current challenges, the company maintains a clear vision for growth, targeting to reach $1 billion by 2031. This ambitious goal underscores the company's long-term strategic plan and its confidence in capturing market opportunities.
The company provided revised guidance for FY '24 with a Compound Quarterly Growth Rate (CQGR) of around 5%. This conservative estimate reflects a blend of caution due to market conditions and strategic acquisition planning. It highlights a balance between growth ambitions and the economic climate's reality.
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Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Happiest Minds Technologies Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumeet Jain from ICICI Securities. Thank you, and over to you, Mr. Jain.
Yes. Thank you, operator. Good morning, ladies and gentlemen. Thanks for joining us today on Q2 FY '24 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 earnings call.
Today, we have with us from Happiest Minds, Mr. Ashok Soota, Executive Chairman; Mr. Joseph Anantharaju, Executive Vice Chairman and CEO, Product Engineering Services; Mr. Venkatraman Narayanan, Managing Director and CFO; Mr. Rajiv Shah, President and CEO of Digital Business Services; Mr. Ram Mohan, President and CEO Infra Management and Security Services; Mr. Aurobinda Nanda, President, Operations and Deputy CEO of Product Engineering Services; Mr. Sridhar Mantha, CTO; and Mr. Sunil Gujjar, Head of Investor Relations.
With that, I will hand over to Sunil for safe harbor statement and to take the proceeding forward. Thanks, and over to you, Sunil.
Thank you, Sumit. Good morning to all participants in the call. Welcome to this conference call to discuss the financial results for the second quarter ended September 30, 2023. I'm Sunil, Head of Investor Relations. You can review our financial statements, quarterly fact sheet and press release, which are uploaded on our website.
The agenda for this call is as follows: Ashok will begin the call by sharing his perspectives on the demand, business environment and our results; Venkat, Joseph and Rajiv will speak about our financial performance and operational highlights, after which we'll have the floor open for Q&A.
Before I hand over, let me begin with the safe harbor statement. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry a risk in terms of uncertainty, because of which our actual results could be different. We do not undertake to update those statements periodically.
Now let me pass it on to Ashok.
Thank you, Sunil. A very good morning to all the participants in the call. I'm happy to share with you that Happiest Minds has continued to deliver industry-leading performance, growing 3.6% sequentially in constant currency. On the revenue growth plus EBITDA, we were at 38.9%, which is another quarter of superior performance. Our EBITDA margin at 24.5% has been well above our guided range of 22% to 24%, and this is now for the 14th quarter in a row. We crossed 2 significant milestones during the quarter. We completed 12 years as a company, and we completed 3 years as a public entity.
I would congratulate all the stakeholders who have contributed to and been a part of this journey and express my attitude for your continued support. During the quarter, we raised capital through QIP and I also sold a small portion of my equity at Happiest Minds. Both these events led to a small dilution of equity interest. The latter was primarily done to fund the capital requirements of [ scan ], the not-for-profit medical research entity that has started and also to enhance the capital structure of Happiest Health. This capital [ entry ] for these 2 entities should take care of their requirements, their capital requirement in medium term.
As part of my commitment and believe to have Happiest Minds exist in perpetuity, my controlling interest in Happiest Minds will not be allowed to go below 40%. I should also clarify that the current shareholding percent of 51.3% is safely well above this threshold. While many companies in our industry are seeing a declining head count numbers, we, in the quarter, have added 237 Happiest Minds to our teams. In line with our commitment to work and execute on a larger vision to be a $1 billion enterprise in sales by FY '31.
In quarter 1, we had given a revenue guidance of 25% without making a distinction between organic and inorganic growth. Based on an assessment of the market dynamics, we are revising this growth guidance for the year to 12% on an organic basis. Additional growth, if any, due to acquisition will be over and above this guidance.
We retain our EBITDA guidance of 22% to 24%. I am now happy to announce major new organizational and strategic initiatives for Happiest Minds. In order to avail of the transformational opportunity being presented to the entire industry, I would say, and to every industry through generative AI, we are seeing a new business unit called generative AI business unit, which will be abbreviated as GBS.
This will become a new engine of growth, and it will require a lot of collaboration because the sales will take place through the entire organization and through every industry group. Accordingly, we have selected Sridhar Mantha as the President and CEO of GBS. Sridhar is a Happiest Minds stalwart since inception and the best person to lead this in view the interactions and collaborations that are required.
Sridhar will be the part -- initiative will be led further by Rajiv Shah as a member of the Executive Board. While doing this, we are also integrating our existing PES and DBS businesses into 1 combined business called PDES, and this will be under Joseph Anantharaju, who has led our most successful business unit up to now.
There will be no change in IMSS. Therefore, we will retain our 3 BUs, PDES, IMSS and now the third one will become GBS. We believe these 3 engines of growth will take us forward to our future goals. I do want to emphasize again, though, that since it will take time to build up the whole organization in GBS, there will be no meaningful revenue until the beginning of the next financial year. Accordingly, we will only start reporting their numbers once that new year begins as a part of our plan that we will draw out. Let me conclude my commentary by wishing all a very Happy Navaratri. And with this, over to you, Venkat.
Thank you, Ashok. A very good morning to all of you on the call. Wishing you and family a very happy Navaratri. The next few minutes, I will take you all through the financial performance and certain key operational highlights for the quarter and the half year that ended September 30. For a start, amidst all that's happening in the world. I'm very grateful for the place we are in.
Coming to the financials, very happy to share that our total income for the quarter for the first time has crossed the $50 million mark. Total income for the half year, at the same time, has crossed the $100 million mark. Now coming back to the quarter. Operating revenues at $49 million, grew sequentially by about 3.3% in dollar terms and about 10.8% year-over-year.
While in constant currency, this growth was 3.6% and 11.6%, respectively. Clearly, [ ourself ] demonstrates our ability to do what is right for our customers and stay relevant and agile plan. Total income for the quarter was INR 429 crores, showing a sequential growth of 6% and 19.3% year-over-year. EBITDA margin for the quarter stands at 24.4% compared to 25.5% in the previous quarter. The 100 bps impact was mainly due to wage hike that was rolled out to a major part of our group effective July 1 of this year.
It's important to note that we continue to beat our margin guidance of 22% to 24% in spite the above industry pay increases, payments of variable pay and net additions in people or where we have seen divergent approaches taken by other industry participants. After taking the increases, as said, our EBITDA for the quarter stands at INR 105 crores, showing a sequential and year-over-year growth of 1.8% and 11.1%, respectively.
Profit before tax was INR 79 crores, 18.5% of revenues and showing a growth of 0.6% sequentially. The marginal decline of 1.2% on a year-over-year basis was primarily due to the amortization of intangibles that came about from the acquisition of SMI that we did in December of last year. Being a quarterly hit of about INR 7.5 crores on discount. Profit after tax was INR 48 crores (sic) INR 58 crores, which is 13.6% of revenues.
Now switching to our numbers for the half year. Like I said, our total income for the first half of the year crossed $100 million. Operating revenues grew 11.7% to USD 97 million, while in constant currency, the growth was 12.7% half year over half year. Total income stood at INR 833 crores, which is a growth of 21%. We continue to demonstrate good cash flow converted almost 98% of our EBITDA coming in as free cash flows.
We ended the quarter with about INR 1,300 crores of cash and cash equivalents, which includes the INR 500 crores that we raised through QIP and the INR 35 crores that we raised through issue of [indiscernible] to all market participants for their continued support for the company. Talking about a few operational highlights. At the end of the reported period, we are 5,285 Happiest Minds, a good addition of 237 over the previous quarter, which include join us from campus.
Our utilization has improved from 74.5% in the previous quarter to 76%. Attrition levels on a trailing 12-month basis have trended down nicely and now it's at about 14.4% compared to the 16.6% in the previous quarter and a significant reduction from the 23.5% we saw a year back. As expected, our return on capital employed has dropped to 23% from the 33% in the previous quarter, primarily on account of the capital raise that I talked about earlier.
It will be our endeavor to improve this return ratio by deploying capital into growth avenues like the new BU that we are creating, Ashok talked about earlier and establishing and also through acquisitions. I request all of you to go through the investor deck on our website, which has much more detail on operational highlights.
Finally, in line with our progressive dividend policy, the Board of Directors of the company have recommended an interim dividend of INR 2.50 per equity share. The record date for this payout has been fixed as October 30. Cash outflows on this count will be about INR 38 crores.
With this, I conclude my commentary, and over to you, Joseph.
Thanks, Venkat. A very good morning to all the participants in the call. We have yet again delivered industry-leading growth in the second quarter, which reflects the continued confidence of our customers in our value proposition. During the reported quarter, we acquired 7 new logos with many of them being large Fortune 500 enterprises. Our continued ability to open doors across these large high-tech companies, energy conglomerates and retailers emphasizes our value proposition.
We continue to execute on our land and expand strategy as reflected by the consistent increase in the average revenue per customer, which is at USD 804,000 now. We were also able to increase the number of large customers as evidenced in an increase of our $10 million and $5 million customer cohort during the quarter.
Now I would like to share a sense of the conversations we are having with some of our customers. I'm delighted to share that the leading global online retailer and hyperscaler chose Happiest Minds as the [ emerging ] engine partner to design interactive user interfaces and to provide automation services for the IoT platform based on our IoT, cloud, automation and product entering DNA.
With our mindful 4D framework, which is Explore, Envision, Engineer and Enhance, we have been assisting companies in their innovation and digital transformation journey. For a multibillion-dollar enterprise in the energy distribution sector, we leverage this framework to transform their document management systems for automated retention, intelligent search and faster retrieval, thereby improving customer experience.
Our comprehensive and integrated suite of solutions are helping our customers secure their distributed IT environment 24/7. During the quarter, a leading warehouse club operator in the United States chose us to provide security assessment services on threat modeling and application security. Companies are reinventing every part of the enterprise using technology, data and AI to optimize operations and accelerate growth.
For a large U.S.-based utilities company, we have been chosen as a key partner to provide data engineering and governance services. We are working closely with alliance partners to deliver the benefits of digital technologies. And in one of a common customer, we are helping an industrial Internet platform provider to build a data platform for their farm to table process using our deep IoT data and AI capabilities.
Speaking a little bit about the demand environment. Multiyear digital transformation initiatives are being broken down into shorter composable engagements. That's what we've seen. This creates the right kind of opportunities for a company like Happiest Minds to exhibit agility, create value faster and gradually and into other related areas. However, in the face of macro and geopolitical uncertainties, customers are getting more prudent and seeking more banks for the above are taking longer to take decisions.
To accommodate this shift in and uncertainty, we have decided to reduce the guidance as alluded by Ashok earlier. With the creation of the GenAI BU, I'm happy to share that the emerging PES and DBS business units into 1 product and Digital Engineering Services business unit as a first step in our strategy to work live and better leverage synergies and capabilities as part of our $1 billion goal by 2031.
I'm excited to be given the responsibility to lead this integrated business unit and broad learnings across customers better focused on white spaces and take our land and expand strategy to the next level. With this, I would like to end my commentary wishing all of you a Happy Dussehra, and I will now hand over to my colleague, Rajiv.
Thanks, Joseph. I'm really excited to guide this new function of GBS and work with a fantastic team led by Sridhar Mantha, President and CEO of GBS. At Happiest Minds, we are known to take technology best well ahead of time. Take, for example, IoT, which we started building capabilities well ahead of time around 2015 before it became a mainstream area of investments for the customers.
We've been working since 2018 on the earlier form of GenAI as part of our AI focus. With a strong pace of AI and analytics capability, the dedicated focus to GenAI will open up significant opportunities for Happiest Minds. Over the next few months, we will define processes and time lines to ensure that all of our 5,000-plus Happiest Minds get exposed to the practical application of GenAI in their line of work. The charter includes training on GenAI and develop teams to engineer business solutions and outreach to our existing customers to showcase our progress in the space. They're already working with 20-plus customers in the GenAI area.
We've to strengthen and forge new partnerships in the alliance ecosystem, including working with Microsoft, OpenAI, Google, AWS, et cetera, and other open source platforms as well. A broader go-to-market strategy to the addressable market with our value proposition, start tracking the financial parameters of GBS going forward.
And we're starting -- we'll be announcing them for the next financial year, as highlighted by Ashok. To conclude, we foresee that generative AI can be a significant real for us in the years ahead and with becoming a $1 billion enterprise by 2031.
With this, I end my commentary, and we can now open up the floor for Q&A.
[Operator Instructions] We'll take the first question from the line of Ashish Das from Mirai Capital.
So my question is on the guidance. You have made a cut in organic revenue growth guidance. I wanted to know what happened during the quarter so that you cut this guidance [ 125% ] to 12%. And also, you mentioned last quarter that there is a recovery in the demand. You were expecting recovery in demand in 2H. What is your view on that right now. .
Venkat, shall I just address the point on overall on the guidance. And then I guess, really, all the business people can talk about what they see about demand visionary any other statements we may have made. And so you're right in one sense that we've never differentiated in the past from -- between organic and inorganic growth.
We were certainly expecting, even as we began the year, to get almost a whole year of a very large acquisition getting reflected in our results. And therefore, the numbers that we had projected out of line to the extent that this particular guidance will indicate. On the other hand, we also know that getting an acquisition through is sometimes a bit of a uncertainty. You really don't know whether the deal will go through or not.
This particular deal we are talking of actually has not gone off the table even now. And yet we don't expect even -- assuming we even close it this year, we don't think we'll get any revenue out of that. So that is the major dramatic increase item, which led to the difference in this guidance.
Overall, there's no question that the markets have had declines. You see this in the results of all the entities who have been declaring the results. And in that respect, I'd say our result continues to be, as we said, an industry-leading performance.
Some of the issues on the -- in terms of giving color to this as well as the demand outlook, I think my colleagues will take up for you, and I think it's really best to each of the 3 business units gives you the response to this particular point that you've raised.
I do want to add that we do need to see a need for giving a further thrust to grow. And that is one of the reasons why we have created this GenAI business unit. It's a major change. We believe nobody has taken a change of this sort. I was addressing this opportunity. It won't yield results overnight, but we believe in the long run, it will certainly play a very -- not only long, medium and long run, it will play a very important role in terms of taking us on to our declared vision of achieving $1 billion by 2031. So with this, let me pass this over to Joseph and Ram. And lastly, Rajiv, because he can then also talk about new business area.
Thank you, Ashok. And before I talk about the overall demand environment, I just want to sort of give a little bit of context on Q3, I think all of us have to be confident that Q3 has a lower number of working days, which is around 3 days lesser than the other quarters because of the Dussehra, Diwali and Christmas holidays.
And we're trying to work our way through that. So I just want to put that as a context. Now if you look at the broader demand environment, I see customers having needs and initiatives that they need to get done to digitize their processes, their offerings and the way they interact with customers. So that's at Uber level, and the demand is there. What we also are seeing is that just given some of the macroeconomic I would say a little bit of uncertainty. But more importantly, at repeated intervals, some geopolitical developments. There's also a little bit of that.
Let's take what's going to happen. And instead of having large initiatives that they would typically have started. They're looking at doing things in smaller -- multiple smaller packages. And to this, as I mentioned earlier, works out to a Happiest Minds' advantage because we are not looking for $20 million, $100 million kind of engagement. We're looking at engagements where we can go and work closely with the customer, validate some of your assumptions, doing POCs, pilots and then take it to implementation.
And while it elongates the sales cycle a little bit, it actually works to our advantage of a company that's more agile, that's nimble and more of a partner than a vendor. And that's what we are seeing in terms of demand.
Yes, this is Ram. As Joseph mentioned, there will be holiday season and lesser number of working days in quarter 3. But that is also a period, there's a lot of budgets are going to realize for the subsequent years. And we believe that the beginning of the next year will be much more better. I'm excited is about our integration of PES and DBS business, which actually makes IMSS to become a horizontal across all the verticals and thereby enhancing our land-and-expand strategy.
And also the GBS business, which will also bring a lot of generic capabilities in the IMSS space whether it is in terms of service, test automation or in terms of securing infra operations where can be very easily integrated to provide better solutions for our customers, and that is what customers are looking at.
So looking ahead, with the integration of PES and DBS and also creating the GBS, I believe that there will be a much better opportunities for us to land and expand in our existing customers and go after new business. Over to you, Rajiv.
So just what Joseph and Ram said. If you've felt some sort of uncertainty that continues to happen and there is a pressure on the macroeconomic environment. So given that I think the kind of work that we perform for our customers and the values that we deliver, we continue to see a level of traction.
They still under continuous cost pressures. They still want to take advantage of newer technologies, open AI, ChatGPT, generative AI, et cetera. And with our platform of integration of low-code data, AI, et cetera, I think we are in the right space for us to really provide, create value for our customers.
At the same time, you have larger integration of opportunity as well because customers are looking at optimizing their own environment, monetize their own set of investments is to continue to see more and more integration opportunities. So from that perspective, I think that we -- the reason we set up the GenAI unit is to really work with the customer to really drive how to set up their own organization, how to increase consumption in their own environment, at the same time, optimize their own environment to become more efficient and effective as well.
So yes, there is pressure. There are disruptions that are affecting all of us. But fortunately, there is no cancellation of contracts or no real price pressures that we have undergone. But at the same time, the opportunities are there as well.
Okay. So one follow-up question on that. So you are saying there is no cancellations and no pricing pressure. So are we thinking that the inorganic contribution would have been more than 10%, but as it got delayed, so that contribution is not coming. And yes, that is the reason? Or do you see that also you cut down your own organic growth guidance to 12%? Just wanted to...
Yes. Venkat, again, I'll take it and maybe this time, you may want to add a little bit. So the first really important thing is to say that actually, there was never any distinction in our guidance between organic and inorganic. So we ourselves internally say so much will be organic, so much will be inorganic. And largely because we were to visualize there when a company of our size is planning even a decent size acquisition.
Let's assume it's a company with $50 million. That's going to impact us in a very significant way whereas you take a multibillion dollar company, even if they do $100 million as an acquisition, it doesn't matter. They don't need to make the distinction. They may get $100 million account or they may get that acquisition, either way, it will become a part of their growth story. Whereas in our case, it's a very distinct difference.
It has to make a distinct difference. And it's another matter that in the previous years, we managed to obtain the reset guidance number in spite of the fact that we had really very little acquisition, negligible, I would say. Here, obviously, while we were hoping for one, it doesn't that we made a distinction even this year, so to that extent, it's difficult for me to say that because we had planned to say x percent, but now we've reached [ 12 ] that is a reduction. That is not the case. It was a composite total, and that is why we are now giving you a noncomposite total because we know the acquisition element is not going through. And therefore, we're giving you the numbers reflecting the current state of the market. Venkat, are you able to add anything?
I'm not able to hear Ashish very clearly. So that's why I'm not able to.
But were you able to hear me clearly?
There is a little bit of static when you speak as well, but I understand this is about the guidance. And.
But if you're not able to hear clearly, you go ahead and explain though I believe maybe we can ask Ashish whether he's got what you needed from my response.
I got your response. Last question from my side. Do you feel pursue the acquisition plan during 2H though it got delayed?
Now you have to repeat your question, even I have not heard you clearly this time. Just say that again?
Just quite a bit of static on the line, I guess.
So my question is, do you still pursue the acquisition plan during 2H though it got delayed?
Yes. So very clearly, there's been -- I mentioned that in the very beginning. We clearly had an expectation of a very large acquisition. And I also mentioned that that's knocked on off the table. But we don't expect any -- if you're considering the states we're now, we've not signed, let's say, at least a level or intent to become due diligence, you won't get any revenue into this year. Maybe in a smaller entity, we may get a small bit of revenue, which is why we said, additional revenue from acquisition, if any, will be above the 12%. But the larger one, if it's signed during this year, it will yield revenue only in the next year. So that's -- but it's not gone off the table. That is a good news. And hopefully, it will come through.
[Operator Instructions] The next question from the line of Sumeet Jain from ICICI Securities.
Just want to probe on guidance. So actually, I mean, if I look at our 12% organic growth guidance for FY '24, that does in line a CQGR of around 5% to 6% for the second half of FY '24. So I just want to understand what gives you confidence of a sharp revival in growth in second half given an overall weak macro environment from a discretionary spend perspective?
Venkat, do you want to add any this? Yes, Venkat?
Yes. I just joined again because I...
So did you hear the question from Sumit?
No, I didn't hear.
Yes, Sumeet, please repeat it for Venkat.
Yes, yes. So basically, I mean, I just want to understand your guidance of 12% organic growth in FY '24, does imply close to 6% CQGR for second half of FY '24, which is obviously a sharp revival of growth what you are assuming. So just want to understand what is giving you that confidence? Is it the current order book or sort of top clients increasing their spend. I just want to understand what is giving you that confidence.
Yes. Sumit, so the first half of the year, we have done 12.7% in constant currency. That's half year over half year. So we are hoping to continue a similar trend of growth for the next 2 quarters, and that's how you get the 12% for the year. So I didn't the CQGR, but if you look at it, you have to continue what you're doing right now for the next 2 quarters.
This is essentially coming from the repeat spend, the repeat client that we are getting. The pickup in business from the new logos that we have signed up, 7 logos this quarter, 13 in the previous quarter and 14 the quarter before. So it's been a strong sign up that's happened. It's been taking a little while than what you would have expected maybe a year, 1.5 years back on the ramp-up.
So those aspects have been considered and most simply, the 2 less working days in this quarter. So we have to really take some alternate steps on that, making a Saturday working. We are working with the project teams to make sure that we are able to make up for those lost days because a day is close to $700,000 in revenue. So we have assumed all of those and a repeat of the first 2 quarters, reasonable repeat of the first 2 quarters, and that's how the number of 12% comes from.
Sumit, in summary, that actually, we're not projecting any major increase in the quarterly growth in the second half of the year. We are literally saying, if we did what we've done in the first half, at least when we will achieve this number. And there's no reason to believe that certainly that we will not be able to look at. But of course, that's still a guidance.
Okay. Got it. So secondly, I want to understand, you guys obviously are sitting on a significant amount of cash for the QIP. So what kind of M&A candidates are you currently evaluating in terms of capabilities or industry verticals?
So maybe really get Joseph to talk about the angles of types of capabilities. And then if you -- because we don't know the size is a reflection of the fact that we've raised cash to do a big one. But maybe, Joseph, you could talk about the types of things since you're interested in. And it can be for many of them for that matter.
Sure, sir. Yes. So Sumit, there are multiple angles that we are looking at when we are evaluating even shortlisting our acquisition candidates. The first one is looking at it from a domain angle, looking at where we can -- or worthwhile where we can get companies that could fill in white spaces that we have from a subsegment standpoint, right?
If you take, let's say, BFSI, in BFSI, there's insurance, we have reinsurance, cost insurance and multiple kinds of things. So we've identified a few white spaces in terms of our hub segments or subdomains where we would like to strengthen our capability. So that's one huge angle that we are using.
The second one is, again, from a technology standpoint, there are white spaces, whether it's some of the low-code/no-code platforms, some of the data and AI platforms and products that we are partnering with where we would like to have more skills and more customers and revenue.
So that's the other one, the technology part of it. We're also looking at it from how it can get us into some of the named accounts or large customers that we have as a target. And if you look at some acquisitions that we made, it led us into a customer that we have been targeting for some time that got us into the health care space, where they had -- where they are the largest vendors for a long period of time and hence, understood the customer environment.
So that was the other -- that's the third angle that we're looking at, where it gets us into a shortlist of customers that we want to break into that can also map to the first 2 parameters that I talked about. And the fourth, which is -- which is good to have is more about does it give us capabilities or market presence in earlier that we're not a new geo that we've not been in. But having said all of that, I think the common parameter criteria that we use is to ensure that whichever company that we are considering, there's a good cultural effect so that from an integration standpoint, we don't run into challenges.
Sure. And if I can add, Sumeet, I think it's equally important sometimes in an acquisition to be clear what we will not do. So one thing we are not going to go and do is to do anything with excess away from a 100% digital positioning or 100% digital business. Second is we will not do something just for the size of scale.
Third, though we will look at areas in AI, which is important. We are not going to look at saying, hey, the latest areas now GenAI let's go and acquire that capability. We believe we will build that capability. We're going to build an organization, and we are already doing that to build that capability. This will be wrong to order and try and what others are doing. This has to be done very closely linked to the nature of our business and add to each one of our industry groups. So that is something we will build ourselves. And within that, you can add to it the areas that [ Joseph ] to.
Got it. That's helpful. And just last question maybe for Ram. I can see your infra management and security services business line have been now flat for last 6 quarters. So can you explain the reasons for the weakness and when can you see the ramp-up in the first line?
Yes. Actually, what had happened was one of our large customers had some difficulty in their business, which reduced some of the revenues for us. But on the other hand, we have been growing and making up for all those revenue reduction, which happened. So that's the reason why you are seeing flat. And as I told you before, we are seeing a possible growth in this particular account as well in the future.
So we are hopeful that we will be able to continue our growth starting quarter 4 of this year. And we are also seeing an increased demand in the security area, which also we believe that we will be in a position to make up for all these issues which we had with respect to growth starting quarter 4 of next year -- this year, sorry.
A very valid observation, and we're I'm sure now Ram is coming into it for a period of confidence because it has been a stress the fact that we've had this well-observed statement of you all bet, yes, there has been a softness for several quarters in a row. But it takes time sometimes to revive from that when you had a setback for no real reason.
It's a reflection of the customer's own business. But that business is a steady, robust business and is now beginning to get back into giving us the sort of business that we were used to getting from there. Plus, of course, exploring many new opportunities, which have taken time to build up. Would you to be right to say, Ram, that we've signed a few contracts which we hope will grow because it takes time to an account to grow.
And it's those new accounts, which will then make up for providing growth even while we accounts which went down, still takes a quarter or 2 to revive.
Yes. The new deals which we have signed up, though we have started small, there is a tendency to grow these accounts because the services have been good. And also our customers are seeing the growth happening in their segments as well. So the new deals which we closed in the last couple of weeks, we believe that, that is going to grow in the next couple of quarters, it will start seeing growth. And that is the reason we are confident that we will be able to grow as usual in the past starting quarter 4 of this year.
[Operator Instructions] We'll take the next question from the line of Dipesh from Emkay Global.
Just one clarification, SMI acquisition, we consider a part of organic revenue growth guidance or it would be additional because last year, it did for about a quarter. Just want to get that clarity. And second thing is about M&A. We are pursuing M&A for some time, no major progress so far. So what explains in terms of whether values and mismatch is driving some kind of delay in closer or in terms of the targets are becoming difficult considering their performance might have suffered considering overall macro uncertainty, if you can provide some reason which explains delay in some of the deal closures?
So I just Venkat and Joseph both of you could respond to that.
So we closed SMI last quarter and last quarter of last year, adding in about $2.4 million into revenues. Part of that has been taken into the organic growth, which is what -- which is how we had planned. And if you look at it, technically, also, it is organic because they came in with 3 good accounts, and we have been growing on the base of those accounts in this year. With respect to the M&A delay, Joseph?
Yes. So what I would say, Dipesh is that we've almost on a weekly or biweekly basis, we've been in conversations with customers. And there have been 2, 3 reasons why we've not been able to get a closure. One is, I think, some of the companies that we spoke to, we didn't feel that there was a cultural fit out there, and we did see this in integration, and therefore, we didn't move forward.
The other reason why we were not able to close is that some of these companies also had fees as private equity funds that were pursuing them, and they tend to be much more aggressive than we would be in terms of valuation and our comfort.
And the third is we also saw that there was some difference in the deal structure in terms of what is the upfront and the earnings component. And so these are some of the reasons. But having said that, we did hope that the current market conditions would get some of the expectations from candidates to a manageable level. And by and large, you're still not seeing that. But we continue to plow away and as I said, we are in a conversation almost on a weekly or biweekly basis with acquisition candidates and we are -- the Ashok and the Board has made it clear that we need to really deliver results [indiscernible] and I and the rest of the Executive Board are seized of this matter and something that we are working hard on.
And I'll add just 1 thing, which may be a bit of a consolation for ourselves. If you see the way valuations have gone in the industry, as inflected not only by the deal, but by the market cap of the companies, who have got in the industry. And you can see that these valuations have declined enormously. So if we had bought something 2 years ago, we would have been left with an asset which has reduced maybe 40%, 50% in his own value, which is what's happened to the entire industry, if you look at it. Now, so that's constellation. This may just be the right time, there's also another angle. And this is a psychology of the person who's come off of acquisition. That person also says, look, I could so much more 2 years ago, now am I going to settle for this.
And there's a little resistance then to accept what is, we believe, has been a realistic valuation offer. So it is an exercise, but we are learning. And there's no question that sooner or later will strike that 1 big deal. And these things in a sense, it's more important to get the right one. Then it is to say, hey, okay, sure, we didn't get that growth in the previous year, but it doesn't matter.
It's more important that we get the right deal when we do deals. And again, as Joseph said, we are clearly very much focused on that task right now.
Mr. Dipesh, any further questions.
No.
We'll take the next question from the line of Gouri Mishra from Narotam Sekhsaria Family Office.
Hello. am I audible?
Yes, mam.
Actually, all my questions have been answered while answering Ashish, Dipesh and Sumit. So I kind of don't have any more questions.
We'll take the next question from the line of Anand Sodhani from Sodhani Securities.
I'm Anand Sodhani from Sodhani Securities. I'm a retail shareholder of the company. So seeing the results of last like 5 quarters and has always coming flat on flat. So in the expensive column, we are seeing the finance cost is every quarter, more than INR 1,000 crores of finance costs. So can you elaborate on what does the finance cost include? I mean is it the pledge, the shares which have been placed by the company? Does that add to the finance cost?
I'm not sure. Are you talking about the revenue being flat or you're talking about the share counts being flat?
No, no. Profit. Profit. That is flat, right? Quarter-on-quarter, there's no growth. The revenues are improving. But because of the finance cost and the expenses are going every quarter PAT is coming through flat, right?
There's some statements you made, which I'm not sure what bearing it has to your question and whether the pledge on the shares, I'll just give you the absolute data, the pledge is negligible. The pledge with a very good call and I'm wondering not-for-profit research entity, which is -- and putting a lot of money and that entity is going to be a showpiece for the whole country.
So it's a very valuable entity being created. There's no speculative process here. My shareholding still remains at 51.3% versus the fact the reason I would at least always keep it above 40. So I'm not sure whether that question has got any bearing on what your first part of your question, but let me give Venkat to answer that for you.
Yes. Yes, Ashok. So Anand, like Ashok mentioned, pledges on a personnel side, a showcase promoter has pledged a very small portion for continuing to raise funds and some interim GAAP financing that he is doing for the activities that we just mentioned. That's got no cost on the company. So that's one.
Second is, if you come down to our PAT, you should not look at interest costs in isolation. You should also look at the money that it generates the average cost of funds for us, interest cost, which we pay is about 4% to 5%. Our other income is generating 7.49% because we have about 95% of our money or 99% of money is in safe fixed deposits. So the arbitrage is one. Second is the funds that we are raising is to obviously build a sort of corpus for the acquisitions that we are talking about.
The interim place where we are raising money through capital and through a little bit of debt, which will then be deployed on acquiring companies where the return on capital will be more than 20%. So if your cost of funds is about 7%, 7.5%, you pay -- you are able to generate 22%, 23% on the capital that you employ in an acquisition or for that matter into your existing business or to a new business, that will generate the alpha return that we talk about on the company.
So that's the reason. The drop for profitability year-over-year, if I should say, is because we have taken close to INR 8 crores to INR 9 crores of intangible write-off this year because we had couple of acquisitions. We follow quite an aggressive way of accounting for the split of the purchase consideration. We have acquired the company SMI and before that [indiscernible] and there is a significant part of that purchase consideration, which goes in its and move intangible. We don't put all of it in goodwill. So there is an assessment which is done.
Based on that, it goes into your goodwill, sorry, intangible and the intangibles and return of over 5 years. We don't carry. So if you really look at the past number, you should compare it to the cash flow that we talked about. So 98% of your EBITDA going back to cash has to be seen in line with PAT as well. So there are leverages that are there in your financials.
Second is, year-over-year, on the EBITDA front, we have taken a drop on no way. There's no 2 ways about it, primarily because we have divergent, like I said, unlike other companies, we have met our commitment to the campus join us. We have -- we are making investments into the business in terms of people. We are paying -- giving pay increases. So if you have seen our competitors or comparitors, industry participants, other industry participants, I like to call it. They've all deferred their pay increases. They're talking about head count reduction. Compare that to what we are doing, we are increasing our head count, making in.
Venkat, I don't think we should say that all have deferred pay, some may have done and some may have been lower.
Some of them. So yes, some of them have deferred the payout. Some of them have made differences in how they do their variable payout commitment and how we take them. So there are divergent approaches being taken with intention to manage the cost, whereas we keeping in line with what we see, as we have been saying, build at the $1 billion company, the platform has been built with investments being made into the company.
And it was with that in mind, we had always made this guidance of 22% to 24%. While we were briefing 25%, 26%, it would not have taken much to say, hey, we are upping our guidance to 25%. But we always mentioned that we would not sacrifice future growth possibilities by not making the investment that is needed today.
So you have to see all of this in conjunction and you will get -- that will give you a better fit of the company that we are trying to build and the organization that we are trying to build.
Sir, the participant has left the queue. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Sunil Gujjar for closing comments. Over to you, sir.
Yes. Thank you for joining us today. We thank ICICI Securities for hosting this all on our behalf. We look forward to interacting with you. You can reach out to us at ir@happiestminds.com. Thank you.
Thank you, sir. Thank you, members of the management. Ladies and gentlemen.
Thanks a lot. Thank you. Bye-bye.
Thank you. Bye.
Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.