Firstsource Solutions Might miss FY09 target of 32% revenue growth

Highlights of the call

The management has maintained its full year guidance of 32% revenue growth. For Q4FY09, the management expects revenues of Rs 415.62 crore. Operating EBIT for FY09 is expected at 10-10.5%. The Company expects to bounce back in Q4FY09 but will not reach targets levels due to domestic business still in ramp up phase and continued stress in collections.

The management expects performance to recover in the March 2009 quarter. The Company is expecting additional service line contract of US$ 4 million from an existing Telecom client and additional onshore process with an existing Telecom client of US$ 5 million.

The Company has seen some impact on the Healthcare segment at the end of Q3FY09.

The Company commissioned 4 new centres one each at Mumbai, Siliguri, Bhubaneshwar and Jalandhar to service its Telecom customer. The Company would be commissioning 2 new centres one each at Bhopal and Coimbatore. The 2 new centres would be for a new customer and ramp up for an existing customer.

The Company has seen stable pricing. However, some customers are coming back for pricing cuts. Healthcare seeing cut in pricing.

It will take the Company about 6 months to get back to normal levels of profitability. The new centres would see steady performance thereby getting the margins back to normalcy.

There has been slower deal closure. Telecom seeing deal closures, BFSI is slow whereas Healthcare is seeing some closures but the pipeline is strong.

For the quarter ended December 2008, on q-o-q basis, Firstsource registered 5% growth in the consolidated operating revenues at Rs 444.21 crore. On constant currency terms, the revenues dipped 1.9%. Operating margins crashed 490bps at 10.3% Other Income was loss of Rs 1.09 crore, interest cost was down 33% at Rs 3.90 crore, depreciation charge was up 21% at Rs 25.50 crore on opening 4 new centres and tax provision decreased 55% at Rs 3.29 crore and the resultant net profit was down 59% at Rs 11.56 crore.

Operating margins crashed 490bps at 10.3% impacted by large ramp up and start up costs of Rs 15.5 crore, lower liquidation rate in collections impacting Rs 3.3 crore, delay in receiving payments from US state governments affecting healthcare business impacting 4 crore and higher SG&A of Rs 3.2 crore on salary hike and gratuity and rupee depreciation benefited Rs 3.5 crore.

Other operating revenue was loss of Rs 3.13 crore on the back of hedging loss of Rs 5.1 crore and grant received of Rs 1.9 crore.

The capex for 9MFY09 was Rs 75.18 crore of which for the 4 centres was Rs 35 crore.

The forex hedge at the end of the quarter was US$ 121 million: US$ 36 million at Rs 43/US$ for Q4FY09, US$ 64 million at Rs 43/US$ for FY10 and US$ 21 million at Rs 46/US$.

Cash & cash equivalents were Rs 83.3 crore and debt was US$ 14 million, which is mainly working capital debt. Debtor days are down at 58 days down from 64 days.

The bad debt provisioning is up by Rs 1.3 crore over the sequential quarter. The Company is worried about payments from one specific customer.

In Healthcare vertical, one new deal was signed and 2 process ramp downs in payer segment, 15 net contract additions in provider segment. The ramp down was not material. In Telecom, there was one contact ramp up. In BFSI, there was one collection ramp down.

The outlook for the industry verticals: Healthcare – neutral to down; BFSI – flat and Telecom – up.

On constant currency basis, UK revenues were up 4%, US revenues were down 4-5% and India revenues were flat.

The Company added 2944 employees during the quarter taking the total number of employees at the end of the quarter to 22520 (17090 at end sequential quarter). Employees in India increased to 17991 (13156 at end sequential quarter) and outside India to 4529 (3934 at end sequential quarter). The number of seats increased at 17715 (13885 at end sequential quarter) with seat fill factor at 74% (75% at end sequential quarter).

For quarter ended December 2008, geographically, US contributed 64.1% against 62.3% in the sequential quarter. India contributed 10.1% down from 10.7% in the sequential quarter. UK contribution dipped at 25.4% down from 26.8%.

- For the quarter, BFSI contributed 27.7% down from 28.5% in the sequential quarter due to dip in seasonal collection business; Telecom & Media contribution at 30.8% up from 29.1% and Healthcare contribution was down at 39% from 39.5% in the sequential quarter.

- Offshore contribution to revenues was at 40.7% down from 42.2% in the sequential quarter.