| Firstsource Solutions Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities of Firstsource Solutions Limited (FSL) at ‘CRISIL A+/Stable/CRISIL A1’.
FSL’s performance improved in fiscal 2021, with revenue growth of 17.9% mainly led by strong growth in Banking and Financial Services (BFSI) segment, healthy traction in digital segment and due to new client additions. Further, during the first nine months of fiscal 2022, the company has achieved 21.1% revenue growth as against corresponding period of previous fiscal led by healthy recovery in healthcare and communication segment. Improvement in operating efficiencies, higher share of digital segment has also benefitted operating earnings before interest, tax, depreciation, and amortization (EBITDA) margin which improved by 70 bps to 16.3% during the nine-month period.
Strong deal pipeline and healthy outlook in Healthcare, CMT and BFS businesses, besides addition of new acquisitions is expected to drive ~14-16% growth in company’s revenues over the near term. Also, the strategy of increased penetration in technology segment and improving revenue is expected to benefit operating EBIDTA margin profitability, which is expected to stabilize at 15-16%.
Earlier, in December 2021, FSL completed the acquisition of American Recovery Services (ARSI) and The Stonehill group (TSG). The total cost of acquisition was USD 80 million (Rs. ~600 crore) and was funded largely out of company’s cash surpluses besides debt of ~Rs.150 crore. The acquisition is expected to further strengthen company’s position in the mortgage and collection segment.
Supported by improved collection of receivables, cash balance as of December 31, 2021 remained healthy at Rs 190 crore. Despite higher than anticipated debt levels, due to part funding of acquisitions, debt metrics continue to remain healthy, though there was a moderation from fiscal 2021 levels. The company may pursue small to medium sized acquisitions over the medium term, and huge debt funding for same is unlikely. Due to healthy cash accruals being generated, debt metrics will continue to at adequate levels over the medium term.
The ratings continue to reflect FSL's established market position in the business process outsourcing (BPO) sector, as well as healthy and diversified revenue profile with three major business verticals: BFS, Healthcare and Communication Media and Technology, healthy operating profitability and adequate financial risk profile. These strengths are partially offset by high geographical and customer concentration in revenue, and exposure to intense competition in the BPO sector |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of FSL and its subsidiaries, as all the entities are under a common management and in the same line of business, and have strong financial and operational linkages.
Please refer Annexure – List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Established market position and revenue diversity: FSL has established itself as a prominent player in BPO space. The company benefits from its scale of operations and revenue diversity across verticals. FSL has created a strong market position through organic growth, supplemented by acquisitions. Its revenue profile is well-diversified among verticals; BFS being largest vertical followed by Healthcare, Communications, Media & Technology contributing 49.6%, 28.9% and 19.6% to revenues respectively.
Healthy operating profitability: The company’s profitability has consistently improved over the last five years; its operating EBIDTA margin stood at ~15.9% in fiscal 2021 compared to ~12.8% in fiscal 2020. This is due to focus on profitable growth through reduction in business from low margin clients (both domestic and overseas), increasing use of digital technologies, growth in collection services and improving performance of acquired businesses. Additionally, over the last few years, FSL has taken initiatives for rationalising its costs through alignment of its delivery centres which contributed towards improvement in the operating profit margin. CRISIL Ratings expects FSL will be able to sustain its current operating EBIDTA margin at 15-16% over the medium term.
Adequate financial risk profile: Debt repayment, health accretion of profits and only modest debt addition has enabled FSL to maintain adequate debt metrics. Its Debt/Tangible Net-worth ratio stood at 1.13 times at March 31, 2021, while interest coverage ratio was at a healthy 14 times in fiscal 2021. Although debt levels are expected to increase in fiscal 2022, debt protection metrics remain adequate; Debt/Tangible Net-worth ratio is expected to range between 1-1.2 times in the current fiscal, and improve gradually thereafter. Albeit sizeable debt funding acquisitions may impact debt metrics, and will be a rating sensitivity factor.
Weakness: High geographical and customer concentration in revenue: FSL derived 68% of its revenue from the US in fiscal 2021, and the rest from India and the UK. The geographical concentration in revenue, especially from the US, exposes FSL to risks relating to economic slowdown in the region and to volatility in the value of the Indian rupee against the US dollar. Also, customer concentration risks persist. However, during fiscal 2021, the top client contributed about 16.4% to revenue while the top five contributed 41.1% which has improved from 24.5% and 41.4% respectively in fiscal 2019. CRISIL Ratings believes FSL’s revenue will remain concentrated in the US over the medium term, driven by BFS and Healthcare segments.
Susceptibility to intense competition in the BPO sector: With the rapid evolution of the Indian IT Enabled Services (ITeS) sector, competition is intense as companies compete for a share of the outsourcing pie. FSL faces tough competition from other pure-play ITeS players such as Genpact, WNS (Holdings) Ltd, Convergys Corporation and Hinduja Global Solutions Ltd (CRISIL A+/CRISIL A1+; Rating Watch with developing implications), besides BPO operations of large information technology (IT) companies such as Accenture Plc, Infosys Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’) and Wipro Ltd. Further, the increasing wage cost as well as costs associated with hiring and training fresh talent remains a big challenge. CRISIL Ratings believes that FSL will continue to face increasing competition in the market place. |
Liquidity: Strong FSL enjoys healthy liquidity driven by expected cash accruals of Rs. 500-700 crore per annum in fiscal 2022 and 2023 and cash and cash equivalents of Rs. 190 crore as on December 31, 2021. FSL also has access to fund based limits of Rs 648 crore, utilized sparsely over the 12 months ended February 2021. While the company would be open to acquisitions, ticket size is expected to be moderate. CRISIL Ratings believes the company has sufficient accruals and unutilized bank lines to finance its capex, debt repayments (Rs.80-100 crores in fiscal 2023) and incremental working capital needs. |
Outlook: Stable FSL’s strong order book and established business position in different verticals, as well as recent acquisitions is expected to drive healthy revenue growth over the medium term. Its healthy operating capabilities will ensure strong annual cash generation. Financial risk profile will remain adequate, supported by healthy accruals. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company FSL provides BPO services across three verticals: telecom and media, healthcare, and BFSI. The company has a global delivery model, with 27,398 employees and 42 delivery centres across the US, the Philippines, India and the UK. The company was promoted by ICICI Bank Ltd in 2001. In fiscal 2013, Spen Liq Pvt Ltd, a wholly owned subsidiary of CESC Ltd (part of the RP-Sanjiv Goenka group) acquired 56.82% stake in FSL to become the majority shareholder. At present, RPSG Ventures Ltd, holds 53.66% stake in FSL.
The company reported net revenues of Rs.4377 crore and profit after tax (PAT) of Rs.405 crore during the 9 month period of fiscal 2022. |
Key Financial Indicators
*CRISIL Adjusted numbers |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit **Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Bill Discounting #Interchangeable with Pre Shipment Credit in Forex ^Fully interchangeable with Post Shipment Credit in Foreign Currency and Standby Line of Credit |
Annexure – List of entities consolidated
*Acquired on November 09, 2021 **Acquired on December 29, 2021 ^incorporated on December 13, 2021 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||
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*Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit
**Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Bill Discounting
#Interchangeable with Pre Shipment Credit in Forex
^Fully interchangeable with Post Shipment Credit in Foreign Currency and Standby Line of Credit
Criteria Details
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