FSLNSEQ1 FY2023August 3, 2022

Firstsource Solutions Limited

10,434words
89turns
10analyst exchanges
3executives
Management on call
Vipul Khanna
Managing Director & Chief Executive Officer
Dinesh Jain
President and Chief Financial Officer
Ankur Maheshwari
Head Investor Relations
Key numbers — 40 extracted
2.7%
r and now monsoon are keeping you all well. Quick Snapshot of the Quarter Our revenues degrew 2.7% year-on-year in constant currency and came in at INR 14,724 million or $191 million. Operating ma
INR 14,724 million
Snapshot of the Quarter Our revenues degrew 2.7% year-on-year in constant currency and came in at INR 14,724 million or $191 million. Operating margins were 8% and EPS degrew by 36.6% year-on-year. The macro-envi
191 million
Our revenues degrew 2.7% year-on-year in constant currency and came in at INR 14,724 million or $191 million. Operating margins were 8% and EPS degrew by 36.6% year-on-year. The macro-environment remains dy
8%
ar in constant currency and came in at INR 14,724 million or $191 million. Operating margins were 8% and EPS degrew by 36.6% year-on-year. The macro-environment remains dynamic and the past 6 or 7 m
36.6%
cy and came in at INR 14,724 million or $191 million. Operating margins were 8% and EPS degrew by 36.6% year-on-year. The macro-environment remains dynamic and the past 6 or 7 months have been unprec
2%
anticipated. As such, we have reassessed our growth visibility and lowered our FY'23 guidance to 2% to 4% growth in constant currency. Excluding Mortgages and the full year impact of acquisitions o
4%
ipated. As such, we have reassessed our growth visibility and lowered our FY'23 guidance to 2% to 4% growth in constant currency. Excluding Mortgages and the full year impact of acquisitions of la
16%
luding Mortgages and the full year impact of acquisitions of last year, we expect to grow between 16% to 19% in constant currency. © Firstsource Solutions Limited 2 The key factors in the
19%
Mortgages and the full year impact of acquisitions of last year, we expect to grow between 16% to 19% in constant currency. © Firstsource Solutions Limited 2 The key factors in the guidan
3.5%
trimming our growth expectations. The Mortgage business is expected to impact growth guidance for 3.5% to 4% and Collections by about 1%. Notwithstanding these challenges, we are confident that our
1%
e Mortgage business is expected to impact growth guidance for 3.5% to 4% and Collections by about 1%. Notwithstanding these challenges, we are confident that our long-term strategies to diversify
200 bps
ect costs, which we anticipate will result in a positive impact to the operating margins by about 200 bps from Q3. Overall, we are confident of hitting an operating margin of 11.5% to 12% by Quarter 4 ta
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Guidance — 20 items
Vipul Khanna
opening
“The macro-environment remains dynamic and the past 6 or 7 months have been unprecedented, making it challenging for us to forecast certain portions of our business accurately.”
Vipul Khanna
opening
“As such, we have reassessed our growth visibility and lowered our FY'23 guidance to 2% to 4% growth in constant currency.”
Vipul Khanna
opening
“Excluding Mortgages and the full year impact of acquisitions of last year, we expect to grow between 16% to 19% in constant currency.”
The key factors in the guidance revision are
opening
“And as such, we continue to expect growth to pick up in the second half of this fiscal.”
The key factors in the guidance revision are
opening
“The Mortgage business is expected to impact growth guidance for 3.5% to 4% and Collections by about 1%.”
The key factors in the guidance revision are
opening
“We are super focused on rationalizing our direct and indirect costs, which we anticipate will result in a positive impact to the operating margins by about 200 bps from Q3.”
The key factors in the guidance revision are
opening
“Overall, we are confident of hitting an operating margin of 11.5% to 12% by Quarter 4 taking into account all these factors, we expect to achieve operating margins of 10% to 10.5% for the year.”
The key factors in the guidance revision are
opening
“The recent outlook published by the Mortgage Bankers Association reflects a further reduction of 10% and 11% for CY2022 and CY2023 respectively, from their Q1 forecast for the same period.”
The key factors in the guidance revision are
opening
“Now, considering the current volume forecast our expectations has shifted out by one quarter, with further declines in Q2FY23, and business likely bottoming out in Q3.”
The key factors in the guidance revision are
opening
“In H1FY23, our margins will be impacted by the lagged alignment of direct cost, people restructuring cost and the higher fixed costs.”
Risks & concerns — 15 flagged
Excluding Mortgages and the full year impact of acquisitions of last year, we expect to grow between 16% to 19% in constant currency.
— Vipul Khanna
This will translate to a steeper Q2 and Q3 decline in Mortgage volumes than we previously anticipated.
— The key factors in the guidance revision are
We believe that this business will bottom out in Q3, and that we have factored in the downside risk with these lower numbers.
— The key factors in the guidance revision are
Given the significant revenue volatility, we expected our margins to decline in H1 and then pick up in H2.
— The key factors in the guidance revision are
In this period of exceptional volatility, it has been difficult to establish a strong trend for both our clients and for us.
— The key factors in the guidance revision are
The talent supply challenges for this industry are acute and hospital margins continue to be under pressure.
— The key factors in the guidance revision are
These are clearly unusual and volatile time and it's challenging to forecast.
— The key factors in the guidance revision are
1,171 million or 8% of the revenue for the quarter, which is 35% degrowth on year-on-year basis and implies margin decline of 417 basis points.
— Dinesh Jain
This is 36.7% year-on-year degrowth with a margin decline of 328 basis point.
— Dinesh Jain
My first question is, can you actually share again the guidance decline, where is how much basis point impact coming from Mortgage and Collection?
— Divyesh Mehta
On the impact of the accounting standard change, we expect this year that will positively impact our operating margin by 80 to 90 basis points.
— Vipul Khanna
So, my first question was with regards to the Healthcare business is seeing a sequential decline on the Healthcare side, the understanding was that we had won a few deals there and thereby one would see continued growth.
— Manik Taneja
So, can you help us understand let's say next three quarter how the trajectory look like, both from revenue perspective and margin perspective, whether we are making too much for Q3, Q4, and which again, carries some risk in terms of guidance or you believe Q2 onwards we will see sequential growth playing out, and margin also will start recovering?
— Dipesh Mehta
And that's largely because Mortgages will decline next year.
— Vipul Khanna
When the Mortgage decline starts to arrest after Q2 that will kind of show up more in the growth at the overall level.
— Vipul Khanna
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Q&A — 10 exchanges
Q
My first question is, can you actually share again the guidance decline, where is how much basis point impact coming from Mortgage and Collection? And also, can you share accounting standard, what was the impact coming from this change?
Vipul Khanna
So, the guidance revision, about 3.5% to 4% is coming from Mortgage and about 1% is coming from Collections, which is primarily from trimming of the growth expectation in H2 of the year. On the impact of the accounting standard change, we expect this year that will positively impact our operating margin by 80 to 90 basis points. So, my next question is that in the credit card repayment business, the delinquencies, as you said, are increasing. But if you look at the various banks commentary, all of them have been highlighting that customers now have a larger chunk of saving a bigger cushion. So
Q
So, my first question was with regards to the Healthcare business is seeing a sequential decline on the Healthcare side, the understanding was that we had won a few deals there and thereby one would see continued growth. So, from that standpoint, if you could help us understand what gave the sequential drop here, if there were any one time elements of revenues in 4Q if you could call that out? And the second question was with regards to the underlying shift towards India, if you could talk about your comments there given the labor or the staffing challenges that one has seen in Philippines as
Vipul Khanna
So, Manik the second comment quickly first, clearly, both the UK and U.S. markets have talent shortage at the frontline level. And to that extent, I mentioned about Mexico Center getting opened in March; Philippines, we already had, but we are seeing good demand. We have won a couple of deals that we are scaling up there. And I think that recognition of considering for contact center or center processes Mexico, and definitely for chat and back-office for India, we see an uptick of demand in Healthcare, we see that in Mortgage, and we see that in BFS and CMT clients in UK, right. I can almost s
Q
Couple of questions, first about the guidance. In the guidance I think you alluded about weakness to persist in H1 and recovery in H2. So, can you help us understand let's say next three quarter how the trajectory look like, both from revenue perspective and margin perspective, whether we are making too much for Q3, Q4, and which again, carries some risk in terms of guidance or you believe Q2 onwards we will see sequential growth playing out, and margin also will start recovering? Second related question is about let's say 2% to 4% constant currency, YoY when we say. what kind of CQGR we are b
Vipul Khanna
So, guidance, overall, we expect that growth will pick up through the year. At an overall level, Q2 will be flattish compared to Q1, and then will kind of pick up. And that's largely because Mortgages will decline next year. And it will kind of mute away the growth in other sectors. So, ex-Mortgage, we expect decent set of growth in other businesses in Q2, and that trend will continue. When the Mortgage decline starts to arrest after Q2 that will kind of show up more in the growth at the overall level. So, on your question of what is the compounded quarterly growth rate, at this stage, we expe
Q
I have a couple of questions from my end. So, can you quantify the mix of servicing and origination in our Mortgage business this time around?
Vipul Khanna
Yes, so Shradha for the end of this year, we expect we will be between two-thirds servicing and one-third origination. At this point in time, we are at about 40-60, between origination and servicing. And Vipul, if we really look at what happened in this quarter, we had guided to Mortgage being at $32 million to $33 million run rate in 1Q. And that is where we actually landed. So, the interest in this quarter was more to do with other businesses than Mortgage actually, so is the understanding right? Partly, but look, we were expecting that we will taper off, we will kind of find the new equilib
Q
One thing is that, if you could give us some sense on your vision for more like a two, three year perspective, because of this heavy dependence on Mortgages, we had a very big impact on our numbers. So, how are we looking to build a company so that we are more diversified, both in terms of geography as well as in verticals, so that we again, do not have the same sort of mistakes. So, if you could just give your broad vision of post this month that we are seeing or headwind we are seeing, how do we see the company say in FY'25? © Firstsource Solutions Limited 15
Vipul Khanna
So, let me just quick comment on Mortgage before I get to the overall vision. So, look Mortgage is a volatile business, it’s a more dynamic business, it’s linked to economic cycles and we know that. Typically, these cycles are four to five years, right, these cycles work in the form of interest rates decline, refinance, become very viable, etc, etc. But given the unique circumstances of COVID, where interest rates went down to record low, demand picked up significantly, this cycle got compressed. And you saw some tremendous growth in our business in the last two years. And at the other side of
Q
I have a few questions with respect to the margin levers, which we can use to maintain the performance of what you guided. Please throw some light, what are the levers we have? And also ex-Mortgage if our business model is under transition phase from next 3 to 4 year perspective then also will this lever will intact or will it be changed? And also guidance from three to four years on top line?
Vipul Khanna
Yes. So, margin levers available to us as I had mentioned, one direct cost for Mortgage business needs to be realigned to the new revenue base, which we have been doing that’s well underway. Second, our technical infrastructure as well as physical infrastructure obviously, needs to be recalibrated down, that's a longer reduction cycle. We have initiated those actions. We will see some benefits in H2, and we will see some more benefits come through in next year as those actions kick in. And three obviously, when you transition this level of business the growth, the SGA as a percentage of the co
Q
I have two questions. Firstly, on a quarter-on-quarter basis, our depreciation has declined. What is the reason for the same? And what would be let's say, a recurring depreciation or the depreciation for the next quarter? My second query was you mentioned that you have been able to get some price increases and some of these price increases are part of your contract. So, in outcome-based contracts also, are there such clauses of price increases, like in your Collection business would you get a better pricing based on outcome, considering there has been inflation, or would the pricing be same, b
Vipul Khanna
So, look, in general in outcome-based pricing, there isn't an auto inflation and it's hard to get price increases as your cost of input increases for outcomes. The lever there is operational excellence since we have the flexibility to continue to fine tune our operating model, continue to bring in innovation, that's a value lever to counter rising prices in general. It's mostly on the input based, FT based where we kind of have either automatic or negotiated price increases. On the depreciation part, I think some of the facilities which have completed the depreciation period. So, there is a sl
Q
Just wanted to understand the fact that you spoke about us aspiring to match peers on growth, or the high growth BPO company, should we probably expect given the fact that while Mortgage would have reduced to a much smaller size, but we have the top client which is not such a very high growth account. So, with almost 30% of your portfolio which has shown probably a subdued growth in that context, can you expect to get back for double digit growth in FY24?
Vipul Khanna
So, Manik I got the thrust of your question, your voice was a little bit in and out. So, you were saying that with the reduced Mortgage portfolio are we confident of getting double digit growth next year? Yes, that’s correct Vipul. Yes, so Manik as you just said, if you look at it, like last year, FY22 ex-Mortgage, we grew 14%. This year, ex-Mortgage and even excluding the Collections and Mortgage acquisition, we are projecting 16% to 19% growth. The foundation for Healthcare, CMT, and DFS business, including UK, and the Collection business, I think, are good businesses. They are showing what
Q
My question was pertaining to credit card recovery business and claims which you get, based on outcome basis. So, that business didn't do well in the last few quarters, what now, since people are talking about a slowdown, would that be a major part of your growth drive this year, and when do you expect that business to pick up, because there is some lag valuation I understand.
Vipul Khanna
Yes. So, you are right, that Collection is counter cyclical business right when the economies go soft Collections in general does well. Because people start to fall behind and stuff and you have more higher Collections than when the economy is good, and everybody's kind of making a lot of money and has a lot of cash. So, that's the classic economic cycle. This one because the coming of pandemic and people had a lot of cash surpluses, the buildup of that is something which is taking time, it's not falling predictable patterns. That's why we will careful instead of forecasting what we originally
Q
Thank you everyone. Look, I know this is a year, which is a year of abrasion, it is a difficult period. But I think the actions we have taken, the investments we have been doing, building our businesses, give us confidence that we will kind of work through this and deliver the growth that we are now talking. So, thank you for your engagement and I look forward to talking to you again.
Management
Speaking time
Vipul Khanna
32
Moderator
12
Shradha
8
Dinesh Jain
7
Sachin Kasera
7
Sonaal
7
Manik Taneja
6
Divyesh Mehta
3
Ankur Maheshwari
2
Dipesh Mehta
2
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Opening remarks
Ankur Maheshwari
Welcome, everyone and thank you for joining us for the quarter ended June 30th, 2022, Earnings Call for Firstsource. Do note that the results, fact sheet and the presentation have been e-mailed to you, and you can also view this on our website, www.firstsource.com Before we begin the call, please note that some of the matters we will discuss on this call, including our business outlook, are forward-looking, and as such are subjects to known and unknown risks. These uncertainties and risks are included, but not limited to what we have mentioned in our prospectus filed with SEBI and subsequent Annual Reports that are available on our website. With that said, I now turn the call over to Mr. Vipul Khanna to begin the proceedings.
Vipul Khanna
Good evening everyone and thank you for joining us today. Hope the summer and now monsoon are keeping you all well. Quick Snapshot of the Quarter Our revenues degrew 2.7% year-on-year in constant currency and came in at INR 14,724 million or $191 million. Operating margins were 8% and EPS degrew by 36.6% year-on-year. The macro-environment remains dynamic and the past 6 or 7 months have been unprecedented, making it challenging for us to forecast certain portions of our business accurately. Successive and substantial interest rates hikes, multi-decadal high inflation rates, and increased fears of recession are impacting parts of our BFS business. The headwinds primarily to our U.S. BFS business are worse than we originally anticipated. As such, we have reassessed our growth visibility and lowered our FY'23 guidance to 2% to 4% growth in constant currency. Excluding Mortgages and the full year impact of acquisitions of last year, we expect to grow between 16% to 19% in constant currency
The key factors in the guidance revision are
The outlook for the Mortgage industry has considerably worsened since we last spoke. This will translate to a steeper Q2 and Q3 decline in Mortgage volumes than we previously anticipated. We believe that this business will bottom out in Q3, and that we have factored in the downside risk with these lower numbers. In the Collections business, the macro indicators continue to point to a gradual increase in delinquency rates. And as such, we continue to expect growth to pick up in the second half of this fiscal. However, the inventory is building up slower than we anticipated. Hence, we are trimming our growth expectations. The Mortgage business is expected to impact growth guidance for 3.5% to 4% and Collections by about 1%. Notwithstanding these challenges, we are confident that our long-term strategies to diversify our business and grow continue to yield results. The demand environment across other segments is strong and is reflected in the strength, in rest of our businesses. Given the
Dinesh Jain
Hi everyone. Let me take you through the some of the financial highlights. Revenue for the Q1 came in at Rs. 14,724 million or $191 million. This implies a degrowth of 0.8% in rupee term and 2.7% degrowth in constant currency. © Firstsource Solutions Limited 7 On the margin front, operating margin came in at Rs. 1,171 million or 8% of the revenue for the quarter, which is 35% degrowth on year-on-year basis and implies margin decline of 417 basis points. Profit after tax came in at Rs. 851 million or 5.8% of the revenue for the Q1 FY'23. This is 36.7% year-on-year degrowth with a margin decline of 328 basis point. In Q1 FY'23, we generated Rs. 1,408 million of cash from operations, and our free cash flow was Rs. 1,238 million after adjusting for CAPEX of Rs. 170 million. Closing cash balance as of June 30th was approximately Rs. 1,935 million. DSO came in at 59 days versus the 57 days last quarter. Net debt as of June 30th '22 stand at Rs. 7,333 million or $92.9 million versus Rs. 8,013
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