Aim to repay FCCBs in full; Re joker in pack: Firstsource

Managing director and chief executive of Firstsource Solutions Rajesh Subramaniam tells CNBC-TV18 that they aim to repay their FCCBs in full. “The strategy the company is pursuing in conjunction with the board and our shareholders is to ensure that we build up adequate reserves over the next six months to repay the FCCB in full,” he said in an interview.

Firstsource has USD 237 million of foreign currency convertible bonds coming up for redemption on December 4, 2012. For repayment, the company aims to utilise USD 150 million cash on its books and they are evaluating multiple strategies to see how we can augment our cash for the deficit of USD 65 million. The joker in the pack is the rupee, says Subramaniam. “The rupee has depreciated significantly, so that impacts the quantum of our repayment,” he explained. For FY13, Firstsource expects profit margins to be in high single digits. They see revenue growth at NASSCOM’s guidance of 11-14%, but Subramaniam says they might be able to perform better in the coming quarters. Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.
 
Q: How much of you foreign currency convertible bonds (FCCBs) are actually outstanding in December? You have accumulated USD 150 million of cash as of year end. What’s the plan with the FCCBs? A; The total accreted value of our outstanding FCCBs on the repayment date which is the December 4, 2012 is about USD 237 million. We have built up cash of about USD 150 million as of March 31st and this cash will build up to higher levels as our free cash flows going into next year start adding to our current cash balance. We have several strategies in place. We are talking to the various constituents in our company, largely the lenders, and evaluating multiple strategies to see how we can augment our cash where the deficit is about USD 65 million. We have six months to come with a credible cohesive strategy to ensure that we really pay our liability which is due on December 4. Q: Are you then looking to raise additional funds to meet the shortfall and hence completely redeemed the FCCBs or will the shortfall just be restructured? A: I think it’s too early for me to comment on whether the company will restructure the bonds. I think at this point in time all efforts are on to repay the FCCB liability. The strategy the company is pursuing in conjunction with the board and our shareholders is to ensure that we build up adequate reserves over the next six months to repay the FCCB in full. The joker in the pack is the exchange rate. The rupee has depreciated significantly, so that impacts the quantum of our repayment changes depending on where the exchange rate would end up at the time of the repayment. We have seen the rupee depreciate by more than 20-25% between the last two quarters and we are managing our liability just to ensure that we manage to repay our liability in line with what we believe is good practice. Q: Q3 was an improvement in terms of margins, but in general for FY12 the EBIT margins are down by 5 percentage points or so. In your press release, you have spoken about improving margins in the current year. Will margins be high single digits or double digits? A: It will be in high single digits. Q: What is the revenue growth that you are expecting in FY13? Will you manage to beat the NASSCOM guidance for the industry of 11-14%? A: It will be at the NASSCOM guidance 11-14%, but there are probabilities that we might improve our growth which could be slightly higher than industry growth rate. We signed above USD 160 million of deals, which we announced in the last quarter, and they will start playing themselves out over the next three years, More often than not we have seen that some of these customers with big deal sizes have a tendency to grow faster than what the total contract values that we have announced. So we are confident that the growth is going to be robust. Backed on our wins in the telecom and media industry, we see significant traction in that industry especially in Europe. We also see every good momentum in our healthcare business in US given that the reforms are having a positive impact both on our payer and provider side of the business. So we are confident as long as ceteris paribus remains. We believe that our ability to grow our ability to grow higher than industry is definitely plausible.