BPO firm Firstsource Solutions is very confident about its outlook in FY16. According to its MD and CEO Rajesh Subramaniam, the margin expansion is intact. The company maintains margin improvement guidance of 150-200 bps in FY15.
The deal pipeline of the company is very attractive and currently stands around USD 400 million. "Currently, our deal pipeline is closer to about USD 400 million. We had announced annual contract wins of almost USD 50 million over the last two years, which translates into about USD 150-175 million of total contract values TCVs," says Subramaniam on the sidelines of Anand Rathi Emerging India Conference. The company is active in defence and healthcare segments and expects significant opportunities going ahead.
The management expects a slightly subdue growth of around 4-6 percent in FY15. However, the company is hopeful of growing above 8 percent next year."Our margin expansion story is continuing, significant operating leverage is in the business. We have guided to 150-200 bps improvement in margins in FY15 over FY14, we did about 11.9 percent EBITDA, which will definitely see an upward bias this year," adds Subramaniam.
Below is verbatim transcript of the interview:
Q: Last week we heard multiple big IT companies scoring some amount of deals. We saw Infosys with USD 1 billion deal, we saw a deal with Bombardier as well. What is the deal pipeline for Firstsource looking like at this point in time?
A: Our deal pipeline is very attractive in the two business segments that we are focusing on. One is in healthcare and the other one is in the customer management space.
Currently, our deal pipeline is closer to about USD 400 million. We had announced annual contract wins of almost USD 50 million over the last two years, which translates into about USD 150-175 million of total contract values TCVs.
We are in active defence and growth with our existing customers, their demand environment is extremely attractive, the capabilities that we bring to the table in addressing our customer needs are seeing significant momentum, not just for the existing business that we do but new lines of work that we are penetrating within our customer segments.
The healthcare, the affordable care act is throwing up significant opportunities where some of the new product developments that we have in dealing with the same customers, CFOs of the large hospitals that we work with will start yielding results as we go in.
I am very confident of what our outlook is in FY16 and ours is a long sales lead cycle and it takes time for the businesses to stabilise but we are set up very well in Q4 and beyond.
Q: Are you telling us that FY15 is likely to be a bit subdued? Q1 rupee revenue was down about 5 percent. So if we have to expect last year’s runrate, will that 10 percent materialise for the full year?
A: Two elements to it. So if I take a look at year-on-year metric, it doesn’t present an accurate picture because we did terminate certain lines of work and we did terminate for customers.
On a like-to-like basis, if I take a look at FY14 in terms of what the constant currency number was and if I take a look at the growth that I am setting up for this year, this year the growth rate we expect would be somewhere between 4 percent and 6 percent but when I set up for Q4, the growth rate going into next year will be in excess of about 8 percent, which sets me up well for the industry level growth rates going into FY16.
Q: What about margins? This quarter itself, there would be wage hike pressure but on a more secular basis, what are FY15 and FY16 likely to look like in terms of margins?
A: Our margin expansion story is continuing, significant operating leverage is in the business. We have guided to 150-200 bps improvement in margins in FY15 over FY14, we did about 11.9 percent EBITDA, which will definitely see an upward bias this year.
We fundamentally believe there is additional 100-125 bps of margin improvement tenable as we take a look at driving a different level of operating efficiency and you also get better pricing leverage with the new opportunities especially in healthcare.
Q: There is a report indicating that by FY16 they are estimating a net debt reduction of USD 100 billion. Is that fair to assume?
A: By FY15 my net debt to EBITDA will be sub one. At the time before the FCCB was repaid, we were seven times debt to EBITDA.
We would be sub one by March 2015, one or sub one which means the long-term debt I would be carrying on books would be no less than USD 85 million. So we are repaying USD 45 million every year and I expect the debt run off to happen pretty comfortably with significant cash flows that the business is generating.
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