| Firstsource Solutions Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Firstsource Solutions Ltd (FSL).
The ratings continue to reflect the established market position of the company in the business process outsourcing (BPO) sector, as well as a healthy and diversified revenue profile with three major business verticals: banking and financial services (BFS), healthcare, and communication media and technology (CMT).
During the first three months of fiscal 2025, revenues grew by a healthy 17% on-year, largely stemming from an improved growth in business from the US market (~26%). On the segmental front, the growth was led by the healthcare segment (~28%) and the CMT segment (~20%), amid a slowdown still seen the BFS business (~4%). Revenue growth in fiscal 2024 has remained low at 4% due to the prevailing challenges in the US and UK economy which led to degrowth in revenues from the BFS vertical. The company has expanded its focus in the healthcare segment with a recent acquisition (May’24) of Quintessence Business Solutions and Services Pvt. Ltd) to enhance its presence in revenue cycle management (RCM). FSL aims to gain share in the healthcare market from the traditional RCM players, taking a tech led offshore centric approach and its acquisition of QBSS is in line with that strategy. Further, the company also announced the acquisition of Ascensos Limited (Ascensos), on Sep 23, 2024, a UK based provider of BPM services for the retail, consumer, and e-commerce verticals with a turnover size of ~Rs 715 crore in FY23. Overall, revenues are expected to grow by 12-14% in fiscal 2025 through an expected pick up in deal wins and new customer additions in its verticals supported amid a waning impact of the slowdown. While growth has remained strong in Q1 fiscal 2025, the sustenance of the same through the remaining quarters and full year shall remain monitorable. Operating margins in the first quarter of fiscal 2025 stood at 15.1% and is estimated to remain at 15-16% with a gradual improvement of 50-75 bps over the medium term through several efficiency measures by the management.
The financial risk profile continues to be healthy, on the back of a sizeable net worth amid moderate debt levels largely comprising of lease and short-term debt. The company’s recent acquisitions of QBSS and Ascensos have been funded through internal funds and itmay pursue small to medium-sized acquisitions over the medium term, which shall remain prudently funded. This, along with healthy cash accrual, will continue to keep debt protection metrics comfortable over the medium term.
These strengths are partially offset by high geographical and customer concentration in revenue and exposure to intense competition in the business process management space. |
Analytical Approach CRISIL Ratings combines the business and financial risk profiles of FSL and its subsidiaries as all these entities are under common management and in the same business and have strong financial and operational linkages. Goodwill on acquisition of Patient Matters LLC, Stonehill group, ARSI and QBSS has been amortised over 5 years.
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: The company is a prominent player in the BPO provider space and benefits from its scale of operations and revenue diversity across verticals. Its market position is strengthened through organic growth supplemented by prudent acquisitions. FSL is largely present in the US and UK markets, which have accounted for 68% and 32%, respectively, of overall revenue in the last three fiscals. Revenue profile is diversified across BFS, Healthcare (payer and provider segment), CMT (telecom and digital media, education technology and consumer tech), and Diverse industries (energy and utilities), which contributed 36%, 36%, 22%, and 6% respectively, to the turnover in Q1 fiscal 2025.
Healthy operating performance: FSL’s operations reported a 17% y/y growth in the first three months of fiscal 2025 vis-à-vis a 4% growth in the previous corresponding period. Growth is attributable to a healthy performance in the Healthcare, CMT and diverse segment which grew by 28%, 20% and 37% respectively amid growth revival in the BFS vertical that reported 4% growth after successive quarters of degrowth. The company is strategically deepening its focus in the healthcare business through acquisition of QBSS which will enhance its presence in revenue cycle management (a market size of US$ 25 bn growing at double digits) and to grow offshore capabilities. During this period, the company also reported strong growth revival in the US by ~26% and UK by 2%. Going forward, revenue growth should be in the range of 12-14% supported by improved order bookings and healthy execution amid a waning impact of the slowdown. While the performance in Q1 has remained strong its growth sustenance in the remaining quarters and full year shall remain monitorable.
Sustained healthy financial risk profile: Financial risk profile of the company remains healthy characterised by robust networth size of Rs 3,541 crore as of March 2024 which is expected to keep improving. The debt profile though remains high at Rs 1,549 crore mainly consists of lease debt of Rs 721 crore and short term debt of Rs 683 crore. Debt is estimated to remain high at this levels mainly due to the higher working capital requirement. During the current fiscal, the company acquired QBSS in the healthcare space for a consideration of ~Rs 328 crore (USD 30 mn) which has been funded entirely through internal accruals. The company has already paid out Rs 200 crore for this and the remaining is to be paid over the year. Furthermore, it also announced a 100% stake acquisition in Ascensos (Sep 23, 2024) in the BPM service space for retail, consumer and e-commerce verticals for a consideration of ~Rs 468 crore (GBP 42 mn) to be funded through cash consideration. The company remains open to inorganic growth plans; however, the size of these acquisitions shall remain smaller and be prudently funded. Gearing continues to remain below unity at 0.4 times as of March 2024 and debt protection metrices like interest coverage ratio was also healthy at 7.3 times in fiscal 2024. The gearing and debt protection metrices are expected to remain in the same range in fiscal 2025. Any change in these expectations that could materially alter the financial risk profile would be a key rating monitorable.
Weaknesses: High geographical and customer concentration in revenue: About 68% of revenue came from the US, 32% from UK and remaining from the Indian market in Q1 of fiscal 2025. This exposes FSL’s operations to risks relating to the economic slowdown in the US and UK and any volatility in the value of the rupee against the dollar. The top 10 clients contributed about 51.5%to revenue while the top five contributed 35% in Q1 fiscal 2025 making the revenue profile from customers concentrated. Revenue will remain concentrated in the US over the medium term, driven by the BFS and healthcare segments that operate from there.
Susceptibility to intense competition: With the rapid evolution of the Indian BPO sector, competition is intense as companies compete for a share of the outsourcing pie. In addition to demand moderation led by customer budget constraints and its bearing on revenue growth, the profitability of FSL remains vulnerable to competitive pressures from other low-cost countries, along with wage inflation and employee attrition, which could alter its competitive positioning vis-à-vis other delivery centers of FSL. The operations further remain susceptible to any unfavourable changes in the legislation, especially in the US/EU region, which may restrict outsourcing to low-cost countries as this may impact the company’s current business model. |
Liquidity: Strong Liquidity is driven by expected cash accrual of Rs 500-700 crore per annum in fiscal 2025 and in the medium term along with cash balances of Rs 210 crore as on June 30, 2024. The company shall continue to maintain sufficient accruals and unutilised bank limit to finance its organic capital expenditure (capex) needs, furnish the debt repayment (Rs 80-100 crore in fiscal 2025) and incremental working capital needs. |
Outlook: Stable CRISIL Ratings believes that FSL will continue to benefit from the healthy order bookings amid established position in different business verticals supported by a healthy financial risk profile and strong liquidity position. |
Rating Sensitivity Factors Upward factors:
Downward factors:
|
About the Company FSL, promoted by ICICI Bank in 2001, is a BPO and ITeS provider across various verticals, largely classified under BFS, healthcare (payer and provider segment), CMT (telecom and digital media, education technology and consumer tech), and diverse industries (energy and utilities). The company has a global delivery model, with over 29,231 employees and 40 delivery centers across the US, India, UK, Philippines and Mexico as on Dec’2023. The company is currently a wholly owned subsidiary of RP-Sanjiv Goenka Group (erstwhile, CESC Ventures Ltd) with 53.66% shareholding as on June 30, 2024.
Profit after tax (PAT) stood at Rs 135 crore on revenue of Rs 1,791 crore for the first three months of fiscal 2025, against Rs 126 crore and Rs 1,529 crore, respectively, in the corresponding period of fiscal 2024. |
Key Financial Indicators (Consolidated)
CRISIL Ratings-adjusted numbers *Adjusted for amortisation of goodwill on acquisition |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
&Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||
|
^Interchangeable with Pre Shipment Credit in Forex
Criteria Details
|