Hope to close FY13 with 10-10.5% EBITDA margin: Firstsource

Firstsource Solutions' consolidated net profit rose 24 percent quarter-on-quarter to Rs 36 crore in the second quarter of FY13. The company's consolidated revenues increased 6 percent to Rs 725.5 crore from Rs 685.2 crore during the same period.

Recently, Firstsource had entered a deal with CESC, whereby the latter will acquire 49.5% equity in Firstsource for Rs 280 crore. Rajesh Subramaniam, Managing Director and CEO of Firstsource Solutions said the stake buy will not change the company's existing management. Its deal pipeline continues to be robust and he sees significant growth in the healthcare segment.

Rajesh further added that banks have extended their willingness to support Firstsource's FCCB redemption completely. At the moment, the company's cash on books amount to USD 145 million and its net debt stands at USD 220 million post FCCB redemption. Going ahead, Firstsource hopes to close the year with 10 to 10.5% EBITDA margins.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Do you expect some kind of management change now that you have new owners?

A: No, we do not expect any management changes. One of the core investment thesis of Sanjiv Goenka, the founder of CESC, was continuity of the existing management team.

Q: Has he addressed you all and did he say anything in terms of changed focus coming from the board?

A: He expects us to continue the good work we have exhibited. It clearly articulates a turnaround in our performance from last year to this year. For them it is a clear diversification with the core thesis being the continuity of the existing management team.

Q: You have shown decent growth this time in terms of constant currency but, I think people would be more worried about the pipeline. Post your USD 160 million deal last year, how has the client money improved and what is the deal situation looking like?

A: The deal pipeline continues to be extremely robust. Our deal pipeline has pretty much doubled since last quarter to this quarter on the back of some transformational deals, especially in the telecom and media sector. We are seeing significant growth in our healthcare peer segment.

Our pipeline is still lagging behind the others in the financial services segment which we expect to pick up once there is a credit cycle update. We definitely see momentum coming into the BFSI statement, hopefully over the next three quarters, but as of now our deal pipeline looks robust.

Q: What impact did the FCCB redemption has had on the P&L and the balance sheet? Would you have a higher interest outgo? Any other kind of extraordinaries?

A: I think the yield-to-maturity (YTM) on the FCCB is adjusted against our share premium. There will be movement from my hedging reserve, which is the delta between the rate at which we took the FCCB and the redemption rate. It is likely to be closer to Rs 53-54 and that will move as one time exceptional item into our P&L. But it doesn’t have an impact on my balance sheet and it’s a one time exceptional item which will hit us in Q3 this year.

Q: You would have about USD 200 million post the infusion from CESC, how are you planning to raise the rest of it? Will cash flow suffice for it?

A: If you take a look at it, our cash at the end of September 30 was close to about USD 145 million. The total redemption liability is about USD 237 million. With new infusion of about USD 51-52 million, I need to find about USD 47-50 million. We are in talks with banks who have clearly extended their willingness to come and support the full redemption of our FCCB.

Q: How will your finance cost increase?

A: Our net debt will be somewhere close to USD 220 million post the FCCB redemptions and that would be at about Libor+500.

Q: When will be the new loans due?

A: The current loan which we have is about USD 180 million. It is in our US subsidiary. Those repayments commence next year for four years, roughly USD 45 million a year commencing June 2013 and the current loans we take will follow a similar pattern.

Q: You said Libor+500 is the rate you are currently paying. What would be the differential in the interest cost post the refinancing?

A: The L+500 is the RBI cap. The loans that we are taking are foreign currency loans which are capped at L+500.

Q: What can you tell us in terms of the kind of margins you are likely to post in the remaining part of the current fiscal?

A: The worst performances are over. We demonstrated revenues of about Rs 718 crore which was 35 percent growth year on year. Our EBITDA came in at about 68 percent which is about 48 percent year on year growth and our EBITDA came in at about 9.5 percent compared to 8 percent last year.

Our PAT came in at about Rs 36 crore. If I look at my first half PAT, it’s more than the entire year’s profit after tax achieved last year. The margin expansion will continue. Our expectation is to get our EBITDA back to somewhere in the 10-10.5 percent range this year and trend that up steadily over FY14.