Firstsource Solutions Limited analyst Q&A

The first question comes from Manik Taneja with Axis Capital.

Ritesh, congratulations for the new assignment. I just wanted to get your thoughts on a couple of things. First of all is a book keeping question with regards to segmental margins across the industry. Is there any one -off regards to the Healthcare segmental margins in the current quarter? That's question number one. The second question was with regards to the point that you made around significant right shoring of business. If I look at the overall portfolio, the offshore on -site revenue mix has been between 25 to 75 or in that deal for almost last 10, 12 years. Do you think this moves in a very significant manner going forward? And would that be driven by just offshoring of the existing business or by virtue of expansion of service side?

I think on your margin or accounting question, I think there are a few one-offs in the Healthcare side of it. One is that as we are seeing a new customer growth, so there is a ramp-up cost, which we had in this quarter. We have one account where we need to make a small provision for bad debt. So I think those are the two -- one is a one-off, one is not a one-off, but in the regular course of work - so that has impacted the margin for the quarter.

So would it be possible to call that out, the impact?

It's not that high. I think margin is slightly lower, but I don't want to really put the number, but there is a one- off.

And let me address the question that you asked, Manik, on the onshore to offshore mix itself. I think the comment you made is a valid one. But at the same time, while we've been focusing on it for some time, and what you will see in the recent past is we've had a pos itive move in terms of just increasing the mix by a couple of percentage points. I still see opportunities for improvement there. But you're also right, it's not going to come just on account of moving existing work to offshore, but also in terms of new bu siness that comes, which will also move offshore as well. One of the things to bear in mind in the world we live in is this is not going to be just about labor arbitrage, but also technology arbitrage that I think is going to come into play with how we're able to render services to our customers. And I think that's something that's going to be very critical. Number two is several of our customers continue to appreciate the fact that they're able to offer that blended delivery model itself. So on one hand, we are looking at right -shoring resources wherever relevant and optimizing our current delivery infrastru cture. But at the same time, one of the things that also creates differentiation for us in the marketplace is the fact that we have a blended delivery model. So in summary, we do expect runway and improvement in the onshore-offshore mix, but at the same time, it's going to come also from expansion of our existing business and adding new business.

Sure. And one last question before I get back to the queue. Your comments with regards to expecting good traction in Healthcare in second half led by payers, is that largely a function of the typical seasonality of the Healthcare payer business because of the open enrolment season?

Well, I think it's coming on a few different accounts, right? So one of the things that I think is gaining traction and currency for us in the payer segment is the fact that, a, we work with a lot of great logos in those accounts itself, right? So we have a good existing client mix that's there as well as a very solid pipeline in terms of new logos that we are going after where we have a seat at the table. What we are seeing in several of these existing accounts is we might be there in one or two of the functional areas and there's an opportunity to extend and expand our footprint, gain more share of wallet, be able to integrate what we do, particularly on the back of the digital intake platform that we have, which allows us to have end-to-end capabilities across, as an example, maybe digital intake and these are some of the capability sets that create competitive differentiation for us in the marketplace. C lients are very receptive to that in the payer space. They are looking to optimize the way they run their business, and this creates opportunity for us to be a value-added partner to them. So the ability to combine technology and operations in a meaningful way, drive transformation in that portfolio and deliver an outcome, I think, creates opportunities for us to be beneficiaries of the kind of pipeline we're seeing in the payer segment.

The next question comes from Nikhil Chaudhary with Nuvama.

Congratulations on new role. My first question is regarding Ritesh, it's been almost two years since we have growth even in terms of your commentary for the business segment, mortgage business continued to face challenges and expect it to remain -- or at least delivery moderate growth only. we are not seeing reboun d despite of increase in delinquencies. While in CMT, we are -- at least due to top client basically moving to -- towards higher offshoring, revenue growth is getting impacted. So just want to understand, given you must be working on strategy win, maybe it 's a bit early, but what's the road map to take revenue growth, let's say, from low single digit to high single digit first and then ultimately to double digit? Any thinking, any road map you have?

So thank you for that question, Nikhil. As I elaborated in my opening comment, the one Firstsource theme is what we are looking to drive across the organization, and it has seven broad themes itself, right? The primary objective of everything that we achie ved through the one Firstsource theme will allow us to get top quartile revenue growth, concurrent with an improvement in margins itself. And what we shared today is my thought process in terms of how we see the current landscape and also ho w I'm trying to reposition ourselves to leverage on the foundation that we have our existing strength. We work with several household brands, as I talked about, in the domains in which we have as well as my prior experiences in scaling businesses is profitably itself. Our intention there is to drive the top quarter revenue growth itself. And what I'm hopeful of is, as we get into the next two quarters going into the end of the fiscal year, we can continue to give you a more detailed picture of how this is developing itself. But one of the first things that we are see ing already is a significant amount of activity -- deal activity, you can also see that in terms of the best quarter of deal wins that we've had in the last four quarters. And as we speak, they are in various stages of ramp. You can also see this in the ne t headcount addition numbers as well as our facilities built out. And we expect to see this in the next two quarters and beyond. But what I'm also trying to ensure is, we are able to maintain this on a secular basis. And that's one of the key priorities as well from my perspective.

Sure, Ritesh. My second question is regarding your comment on Gen AI that disruption due to Gen AI is creating opportunity for you and you are training some AIOp offerings, right? Can you please give more color, maybe quantify if possible?

Absolutely. So let me address this from a wider context of the BPO industry as a whole. Most enterprises today are still early in their adoption cycle. And in fact, most of our clients were caught flat -footed with the pace of advances in the AI field itself. And as you know, every enterprise client today has been asked by their Board about what their AI strategy is? They are currently engaging with technology products services companies for advice and guidance and most of the efforts today are actually on using the time to focus on data quality to ensure that the AI can add maximum value and experimenting with POCs to figure out how they can best leverage Gen AI within their organizations. We've realize that the cost to compute and the cost to infer is still substantial and hence, several enterprises are struggling to make business cases stack up, and which is why they 're going with this fast experimentation cycle, which we are also engaged with. As I mentioned, we've got an inventory of more than 100-plus use cases, we're working across several POCs, which are moving towards pilots and so on and so forth. Secondly, I expect this to also lead enterprises to get more selective and where they want to invest in proprietary large language models and also where it may be economical to outsource. If you take an area like customer service, as an example, today, only 27% of the market is actually outsourced. So there's a tremendous opportunity for players like us to continue to, a ) take share of wallet from large players, but, b) also as the overall market expands, and this is where a lot of customers are currently in active dialogue, so say can they increase the percentage of work that's outsourced offshore leveraging technology itself and Gen AI adoption in some sense, could lea d a significant expansion of the share where enterprises will increase the amount of work that they have outsourced. We are already seeing green shoots on this front. My personal take is that I believe that companies such as Firstsource are ideally positioned to be a net gainer from this trend, given our right size were neither too big to suffer from incumbency disadvantage not too small to lack domain experience and a roster of quality clients with a sizable wallet, but where we continue to have headroom for growth. And finally, I also expect Gen AI adoption to open up new market opportunities and new revenue streams. For example, we have the opportunity to partner with technology companies who are developing domain or function-specific LLMs. Given our deep domain and data knowledge, we're actually doing a lot of work already on the data infrastructure side, whether it's around data annotation, data labeling with several leading consumer tech companies. And this is an opportunity which will continue to grow as enterprises prepare the data to be relevant for use and maximizing the outcomes with AI itself. We're also seeing the emergence of new services around AIOps, and that's gaining significant currency and traction in the marketplace itself. So overall, I think this is something that we feel good about in terms of how it's likely to play out in the marketplace.

The next question comes from Dipesh Mehta with Emkay Global.

Okay. So two questions. First about I think you earlier in your one Firstsource framework alluded to white spaces. So if you can help us understand the identified white space across segments and any plan to expand into from the major verticals, three vertical where we are to add any fourth vertical kind of thing? Second is about cross-sell and up-sell. Now you indicated about some of the identified client partners and all those. And so if you can help us understand how -- what changes you are making in go-to-market which can help you to create strong even after a strong deal closures? So if you can provide some sense around it.

Thank you, Dipesh, for your question. Let me address the first point and then come to the second part of the question. So if you think about our current footprint in existing accounts, in several of the accounts we might be present in one or two capability areas. So we might be doing, as an example, collections and customer experience for a bank, but there's probably opportunity to increase our share of wallet in just those areas itself within the bank. We might also have the opportunity to, let's say, service some of their assets, whether it's consumer loans, mortgages, credit cards, et cetera, from a back-office loan processing standpoint. We might also have the opportunity to help them in their risk and compliance, financial crimes, fraud and so on and so forth as capability sets. Each one of these represent areas where we can either increase share of wallet or expand into areas that we might not be present in. And this is where -- this is what I mean by the white spaces that we see in several of these accounts that we currently partner with. Your second question was related to -- the second point in the first question was related to other new verticals that we might be thinking about. Look, the three verticals that we play in, and I'll also include utilities in this, but if you think about ba nking, financial services, Healthcare, communications, media, technology and the utility space, we address a substantial part of the industry addressable spend itself. So on one hand, our focus is to continue to go deep in these verticals because that's what creates competitive differentiation for us. I'm a firm believer of the maximum that less is more, and it's better to be an inch wide and a mile deep rather than try to be everything to everybody. But at the same time, look, there might be opportunistic areas that we might choose to get in, it could be in an emerging geography, which we might say, “Hey, look, it's worthwhile for us to try and get going there. and leverage the industry verticals that we're already in ” to get into those geographies from a new market standpoint. It could also -- there could also be opportunities coming about where we might say, "Hey, there's a tuck-in acquisition to get a foot in the door in a new vertical." But those kinds of things are more opportunistic rather than something that we are actively planning for. The second question that you had was related to how we are thinking about our account management structure and how do we plan to scale up our footprint in these accounts itself. One of the areas of opportunity for us is where we have several accounts, whi ch I would call a strategic logo, and these have the potential to give us several tens and hundreds of millions of dollars in terms of the opportunity or the addressable spend in those accounts itself. One of the things that ’s critical to realize that potential is to have dedicated team structures, which can allow us to interact with senior stakeholder relationships, multiple buying centres and create as well as close the opportunities that come as a consequence of that. And that’s where one of the things that we are looking to do is to continue to step up investments where those opportunities exist. Have dedicated people whose life depends on growing those relationships itself and realiz e the full potential that these accounts represent. Dipesh, does it address your questions?

Yes, it does. The last question is just about the margin. Now we are marginally turning our guidance to 11% and 11.5%. So any specific headwinds which you are forcing in H2, considering any investment plan or something? And how one should look medium term, you indicated profitable top quartile growth, but whether margin also would be top quarter in once we look medium-term perspective?

So, let me address this on two fronts. So one is we have indicated that from an EBIT margin standpoint, our guidance for H2 is 11% to 11.5% from an EBIT perspective. And we want to continue to operate with that even with some of the investments that we want to continue to make in the business itself. What I am confident of is of improving our margin trajectory over the medium term without compromising our growth aspirations. And I see multiple levers for that. We talked a little while back the on-site to offshore shift is an obvious one. And while we'v e been focusing on that for some time, I still see an opportunity for improvement out there. But in addition to that, right, there are multiple levers that exists, whether it's the employee pyramid, whether it's span of control, how we staff our delivery models, how we look at right shoring resources across functions, optimizing our current delivery infrastructure, I think we have spent an enormous amount of time already in the 8 weeks that I've been here detailing out all the value levers that exist for margin improvement itself. And I think we expect that this will result in improvement from the levels we are at. What I want to also add is, I'll be able to give you a more concrete sense of our revenue growth and our margin aspirations with our Q4 results, but I am confident of improving our marg in trajectory over the medium term without compromising our growth aspirations.

The next question comes from Jalaj with Svan Investments. Please go ahead.

I had two questions. One was with regard to the cash flow statement. I do see in the working capital adjustment, that there is a reversal entry for loans and advances, almost INR160 crores. Could you throw a little light on it as to what does it stand for?

I think there's a reduction in the liability. I'm not sure which line item you're referring to.

changes in working capital just below the trade receivables.

This is related to the investment of about GBP 15 million as part of the extension of our contract with the Top client that we highlighted in Q1FY24. Of this GBP 9.5 million was paid in H1FY24 and the balance will get paid in FY2025. [This part was added after the Q2FY24 earnings call.]

Sure, sure. And second question was with regards to -- for Ritesh, you mentioned that our aspiration is to go to top quartile performance. So maybe in the short term -- in the medium term to long term, so you partially did touch up on that, but I just want ed to have a what would it take us to be there in terms of service lines offering? Do they need to be expanded or do we have enough bandwidth in terms of offerings right now? So what would be the strategy to be there? What would it take to be there?

So thank you for that question. If you go back to what I talked about in the in the ‘One Firstsource’ framework itself and where the opportunities are, right? One of the things that you will see in the context of that was, a, the opportunity to cross-sell and up-sell in our existing accounts itself, right? And this is adding the share of wallet in the existing work we do, but also expanding capabilities in those accounts. So the second thing that we also talked about is not just take the five service lines that we have today, whether it's collection, CX, trust and safety, data and analytics, right, and the entire digital piece itself, but the objective around that is to ensure that we are able to bring those capabilities in every account itself, right? That's critical from our vantage point. At the same time, we are also actively strengthening our footprints from a delivery standpoint in Eastern Europe, South Africa and Latin America. I think it's a combination of each one of these things. It's not one or the other, right? So all of these levers together when deployed collectively result in a very focused execution framework creates the playbook or the foundation for top quartile revenue growth. So it's not one or the other, but the ability to bring all these together to enable that. One of the questions that came a little while back also is having a dedicated team, which is the other area that we're also focused on to say, look, if there is a strategic account that we believe has headroom for growth, let's make sure that there is a person who's focused on trying to grow that relationship in a meaningful manner. So that becomes also an additional lever that's there. So it's a combination of all of these things. Identifying the right accounts for growth, knowing the white spaces in thos e accounts, having a plan to deliver against that, having the right set of capabilities to be taken to those accounts and having the right kind of delivery and execution capabilities to back up what we need. Bringing all of these together creates the secre t sauce for secular growth, which ends up in top quartile.

Got it. And one more question, if I may. So there has been this discussion of the rightsizing or moving from on-site to offshoring. So where are we on those -- in terms of, if I were to say, let's say, 100% of the old accounts are the pie which is, so rene wals would come, so we would see this movement? I'm asking this because there might be revenue loss, margins would be accretive. But since the on -site billing and offshore billing are slightly different. So how much of the percentage of the portfolio has already been converted or of that which can be in this sense?

So without getting into specifics of what percentage of our portfolio, etc ., I think the way to view this is on two counts. Number one, in several of our existing accounts, we see the opportunity to move some of the work that we might be doing from onshore to offshore where relevant, but also at the same time, take new business offshore as well. Clients value us for the end -to-end capabilities that we're able to bring and the blended delivery mix that exists in our model itself. Secondly, the world we are moving to is no longer just about labor arbitrage, but it's also about technology arbitrage and the ability to bring that to bear to drive meaningful transformation and business outcomes, I think, matters to our customers. If you are able to bring a couple of those things together itself, what we will be able to do is going to be revenue accretive as well as margin accretive. And I think that's what I'm working closely with the entire leadership team on.

As there are no further questions, I would like to hand the conference back over to Mr. Ritesh Idnani for closing comments.

So thank you all for joining the call and the interaction. I just want to close with a few final points. I am pleased with our strong order bookings during the quarter. We are now in execution mode on these deals and the ramp -up should accelerate our growt h momentum over H2 FY24. More importantly, pipeline replenishment in the quarter was also significantly healthy despite the strong deal wins. This gives me confidence on the trajectory in the medium term. We have realigned our strategic focus under the one Firstsource framework with the seven strategic themes that I talked about upfront, and we are now putting this into action. I look forward to continued interactions with you. Thank you once again for joining this conversation.

On behalf of Firstsource Solutions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Have a good day.