See FY14 rev growth of 9-10%: Firstsource Solutions

Ekta: I just wanted to focus on your margins which improved from 8 percent in Q3 FY13 and 4.2 percent in Q3 FY12 to the current levels that it is at, how much more of a margin expansion can we see from Firstsource Solutions and what would it be predicated on?

A: The margin improvement at the EBITDA level, we see at least another 150 basis points improvement in FY15. At the net levels this will translate into anywhere between 170-200 basis points. This is largely on account of many interventions that we have created over the last 12 months be it weeding out non-profitable accounts, weeding out lines of business in existing clients that were bleeding cash.

We believe most of the benefits of the actions we have taken over the last 12 months will start playing itself out for the full year in next fiscal which is April 01 2014 onwards.

Similarly, there are several clients where we believe the economics could be turned around based on the value added interventions that we have created especially in the healthcare segment and the hospital market segment, which we believe with the Affordable Care Act driven by Obamacare mandate to see significant impetus over the next couple of years.

Therefore, a combination of a product mix change especially seeing growth in the healthcare business and the customer management business coupled with the weeding out of non-profitable accounts and turning around accounts which are economically challenged but will do well based on certain interventions we expect these to help us drive a better margin profile next year.

Anuj: Your stock has been re-rated over the last six months and large part of that is because the market believes that you will outperform the BPO industry -could you give us some outlook in terms of your revenue growth and profit growth for FY15?

A: In terms of revenue growth this year we will grow at about anywhere between 9-10 percent compared to the Rs 2818 crore that we did in FY13. I expect to better those growth rates; based on the constant currency we will close the FY14 largely because we see significant momentum in the healthcare space which will have superior growth rates to the industry. Growth rates of 11-13 percent which has been expected.

There would be certain businesses that will be flat because we are harvesting them for value. So, while they might be a drag on the overall growth but a combination of superior growth in healthcare and customer management will see us drive non linear margin expansion to the growth rates we have on revenue. So, margin expansion this year, our profitability and net profit is likely to be anywhere between Rs 180-185 crore and it won’t be unreasonable to expect at least a 30-35 percent growth on those numbers next year.

Ekta: What about the cash that you’ll generate even from the business? How exactly does the debt repayments schedule line up for Firstsource and how much cash do you anticipate to generate in FY15?

A: Our EBITDA margins on revenue base of anywhere at Rs 3000-3050 crore is closer to about 11.8-12 percent. On that our EBITDA conversion to cash is anywhere between 80-85 percent which gives us ample scope to repay our principle and service our interest obligation. Going forward our interest cost with the USD 45 million amortisation of loan repayment which we pay every year our interest cost progressively comes down and with an improvement in EBITDA which I have articulated what we expect next year the net debt position of the company becomes extremely comfortable and I expect it to be sub 1-1.2 next year net debt to EBITDA.