U.S. Markets closed

Edited Transcript of FSL.NSE earnings conference call or presentation 2-Aug-19 1:30pm GMT

Q1 2020 Firstsource Solutions Ltd Earnings Call

Lower Parel, Mumbai Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Firstsource Solutions Ltd earnings conference call or presentation Friday, August 2, 2019 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ankur Maheshwari

Firstsource Solutions Limited - Head of IR & Corporate Planning (M&A)

* Dinesh Jain

Firstsource Solutions Limited - President & CFO

* Vipul Khanna

Firstsource Solutions Limited - MD, CEO & Additional Director

================================================================================

Conference Call Participants

================================================================================

* Devanshu Bansal

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Mohit Jain

Anand Rathi Financial Services Limited, Research Division - Analyst, Technology

* Ruchi Burde

BOB Capital Markets Limited, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and a very warm welcome to the Firstsource Solutions Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankur Maheshwari from Firstsource Solutions Limited. Thank you. And over to you, sir.

--------------------------------------------------------------------------------

Ankur Maheshwari, Firstsource Solutions Limited - Head of IR & Corporate Planning (M&A) [2]

--------------------------------------------------------------------------------

Thanks. Ali. Welcome, everyone, and thank you for joining us for the quarter ended June 30, 2019 earnings conference call. To take us through the results and to answer your queries, we have with us today Mr. Vipul Khanna, who has joined us as our MD and CEO; and Dinesh Jain, our CFO. We will be starting this call with a brief presentation providing an overview of the company's performance, followed by the Q&A section.

Please note that the results, the fact sheet and the presentation has been emailed to you, and you can also view this on our website, www.firstsource.com. Before we begin the call, do note that some of the matters we will discuss on this call, including our business outlook, are forward-looking and, as such are subject to known and unknown risks. These uncertainties and the risks are included, but not limited to, what we have mentioned in our prospectus filed with SEBI and subsequent annual reports that are available on our website.

With that said, I now turn the call over to Mr. Vipul Khanna to [begin the presentation for today.]

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [3]

--------------------------------------------------------------------------------

Thanks, Ankur. Good evening, everyone. Happy to be here, happy to sort of start to get connecting with you on this phone and subsequently. Very excited to be on Firstsource Solutions at this juncture of the company's evolution. I joined a few days ago, today, was the first Board meeting that I attended. Quick two minutes about me. Spent most of my career in BPO, Business Process Services, Business Process Management or Digital Operations; and early part of my career in the American Express captive in the mid-90s; was part of the [starting] of eFunds, which built up the bridge on BPO business, and now it's part of Fidelity National. Then I was hired as the CEO for the UBS captive in 2005. And then post financial crisis, that captive got sold off to Cognizant Technologies. And I joined Cognizant as -- for their BPO business, which we called it the operations. I spent my last 9, 9.5 years building that small [sort of captive] into a global top 5 BPO business, that's across industry segments and [building] a lot of digital assets and technologies. And at this stage of my career, very excited to join Firstsource, very solid portfolio of assets, very talented people. And I look forward to sort of working with this team, with this business as well as with all of you. For the results for the quarter gone by, if I could request Dinesh to take us through, and we'll come back for questions.

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [4]

--------------------------------------------------------------------------------

Hi, everyone. Good evening. (inaudible) Financials forwarded [to you,] but I'll take you through one more time. The revenue for Q1 FY '20 is at INR 9,798 million in compared to Q4 of FY '19 of INR 9,672 million and Q1 of INR 9,191 million. This represents year-on-year growth in the rupee term of 6.6%, while growth of 5.2% in constant currency. Quarter-on-quarter, also grown by 1.3% in rupee term and growth of 2% in constant currency. I think most of them will be [arrived] during the year. And during this quarter, we got a new accounting standard called 116, which has got implemented by all of the -- most of the company. And -- but in order to really [cover,] so basically the apples-to-apples comparison, we are going to take you through the normalized EBITDA, although the financials will have the adjusted EBITDA after 116. So EBITDA performance of Q1, EBITDA is at INR 1,373 million, which is 14% of the revenue, which represents quarter-on-quarter, lower by INR 11 million or 0.8% degrowth and margin reduction of 0.3%. Year-on-year, we've still grown by 7.2%, which represents INR 92 million, margin expansion of 10 basis points.

Well, we're going to [look there at] reported EBITDA, it will be INR 1,657 million or 16.9% of revenues. [All in the] similar way, the EBIT profile, the operating EBITDA (sic) [EBIT] is INR 1,175 million or 12% of the revenue, which represents quarter-on-quarter, lower by INR 20 million or 1.7% degrowth and margin reduction of 0.4%. Year-on-year, we've grown by 6.7%, the total [p-value] of INR 73 million. Margin remained flat on year-on-year. And here also the adjusted [here are -- or the leased here,] as per the reported (inaudible) INR 1,217 million, which is 12.4% of the revenue.

PAT performance, we are at INR 912 million, which is 9.3% of the revenue. Quarter-on-quarter, we lowered by INR 71 million or 7.2% degrowth, margin reduction of 90 basis points. Year-over-year, higher by INR 26 million, or 2.9% growth, margin reduction of 0.3%. In that, as the first time, [we are updating] Ind AS 116. We do [hold well with regards to] some charge, which is coming (inaudible) normalized one, which is in this quarter, is around INR 2.5 crores, which we have taken (inaudible) Cash and cash equivalent at INR 1,887 million in compared to INR 1691 million as of March 31, 2019.

The next slide basically is more a tabular representation of the number, and there basically, we are talking the reported number. Really here, we cannot -- these are not comparable. Q4 is (inaudible) 14.3% EBITDA, while as of today, we are at 16.9%. But I think more representative number will be the PBT there. Q4 was 11.5% with INR 1,112 million, which currently we're at -- Q1 is at INR 1,069 million, 10.9%.There are no other specific callout on this one. And I think we'll continue to showcase the year-on-year performance on normalized basis for EBIT for another 2 more quarters. But quarter-on-quarter, I think next quarter on [volumes, normalized report] the Ind AS will have (inaudible) quarters.

Some other highlights for the quarter. Our employee stands at 18,550 employees, which is equally distributed between India and outside India, 9,305 employed in India while outside India we have 9,245 employed. New addition, at least -- net reduction this quarter is 162 employees. Attrition levels remains around -- (inaudible) between 43% to 45%. Current quarter is slightly higher on onshore and offshore remains around 45%. [In fact,] in the last quarter, (inaudible) there are challenges [in the U.K.] (inaudible) due to the [Brexit] which is still hanging. Unemployment levels are lowest in the many of the [cities.] So I think that challenges remain, but we're still be able to overcome by some percentage. But we're still seeing the [challenging impact that we are faced to.] At this point, (inaudible) still [stand] very strong. We have outstanding FX of $57 million and GBP 100 million in (inaudible). Next 12 months, 87% coverage (inaudible) at INR 70.3 level; 94% coverage for pound at INR 99.6 level, and 40% coverage [for GBP] at PHP 72 level. Next 13 to 24 months, we have 26% coverage on USD dollars at INR 76.5 level and 82% coverage for pound at INR 102.5 levels. Post 24 months, we only covered the pound portion (inaudible) which is 85% coverage at INR 111.4 levels.

I think next slide, we have a different [part] of the revenue, which -- where we want (inaudible) Geographical, still U.S. remained the highest geography, with 57% contribution to revenue, U.K. at 41.6%, and India and the Rest of World at 1.4%. I think the growth, which we have seen in the U.S. market, is getting driven through our mortgage businesses (inaudible) due to the interest rate (inaudible) [tender and origination business really is a] good part of it.

By vertical, BFSI still remain the largest vertical for us with 36.3% contribution. Telecom & Media, which is mainly the media, is 27.3%; and Healthcare, 33.4%. Others is getting increased as we have a utility customer growing with us, which we have talked in the last quarter, too. Revenue by delivery, again, offshore-onshore mix continue to be towards the onshore side. But we are seeing this quarter, and I think as we talked in Q4 also that we are seeing some good growth on the offshore side, finally [upcoming leaders,] and that is getting represented in the Q1, where we had a 22% offshore and 77.5% on onshore, (inaudible) which was 18.5% and 81.5%.

Revenue by segment, Customer Management always is the largest segment for us, which is 55.5%. Healthcare remains the second with 33.5%, and Collections is at 11%. Top line, I think, has remained around the same level, 24.5%, 25%, and the top 5 customers still represent around 41.2%.

Looking at next quarter on the outlook, which we are looking, looks to be -- I think growth momentum continued driven by macro tailwinds coupled with new business wins. BFSI, U.S. and U.K., Healthcare Provider and Utilities to drive the growth for us. Surge in the refinance volume due to the interest rate, I think, in Mortgage business continue to be very good for us for -- at least for next 2 more quarters, we can see the visibility. Offshore business, as I talked in the -- that now that is the growth we have seen from the U.S. as well as the U.K. customer [both side].

Pipeline across business is robust. Focus on long-term digital-led engagements continue, and we are -- have a continued focus on those engagements.

Low unemployment rates persist as of today in the U.S. and U.K. And especially the U.K. is very strong for us as of today, although there are some positivity we are seeing it, but I think still (inaudible), all the talent and actually continue to have a lower attrition rate [possibly].

Revenue growth guidance. Although we are -- as we had talked in the last quarter, I think this Sky rebalancing has taken place, where the Sky account kind of as [400], I think, has been moved to in-house by the Sky, which were the (inaudible) side of the operation. And we were hoping that [buyer] will have a Sky mobile account, which will come back to [us] but I think Sky has, I think, as of today, marketed even on that piece. So -- but looking there -- by that scenario, but still we have a good growth coming from our 2, 3 big BFSI accounts in this quarter, and we still hope to maintain there a guidance at 7% to 9% in constant currency terms.

Margin expansion, although, this quarter is still lower, and I think one of the reasons are the attrition, which we talked, in the U.K. market as well as, I think, the cost of growth in the mortgage and the collection side, 2 businesses, which we are helping as well. So they're growing with us, especially on the offshore side where the cost of growth is heating up. That is good to -- a good problem to have because we can see the better margins from Q2 and Q3. So we are still keeping the margin expansion in the historical 50 to 75 bps (inaudible).

I think with that update, I'll hand over to the moderator to -- for they open up for the questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Mohit Jain from Anand Rathi.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [2]

--------------------------------------------------------------------------------

So what I'm asking is with the change in management, if -- what is the view of the new management in the sense whether to maintain such kind of growth rates. Would you like to use balance sheet growth or an inorganic [fill up gaps]? Or you think it is important to deleverage and then strategically work out your balance sheets and then focus on organic [plan] for growth, penetration, [momentum]?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [3]

--------------------------------------------------------------------------------

Mohit, I think is very initial as of today to really change the guidance and thought where we are as of today growing. But I think as we talked in the past, that currently around where we'll have a surplus cash availability and we are looking in areas where we need to grow differently. Digital is one of the areas which we talked in the past, and I think the experience that Vipul is bringing on the table, we will open up for that investments (inaudible). But I think you have to wait for one more quarter probably when we will come back with more detail where we are really going [whether] from the existing client base or (inaudible) location or (inaudible). Vipul, you want to...

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [4]

--------------------------------------------------------------------------------

Organically, you're saying like 5-plus percent which is [driven for] us?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [5]

--------------------------------------------------------------------------------

Absolutely. Look, as of today, all the pipeline which we are looking is all the organic growth. So we are not talking inorganic in -- at this time.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [6]

--------------------------------------------------------------------------------

Sir, I was looking more from a 3-year perspective. However, the -- per '20 guidance is absolutely clear because your existing clients will [see] you through. I was generally looking at industry outlook and your thoughts on the same.

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [7]

--------------------------------------------------------------------------------

Mohit, this is Vipul. Look, so I just joined last week. I'm kind of going around to different locations, getting to know the team and getting to understand our business. My initial impression is that we have a strong and interesting portfolio across Customer Management, Healthcare, Mortgage and Collection sides between U.S. and U.K. All of these have headroom for growth. They are changing with digital, the newer assets. I'm very encouraged by the quality of digital assets we have, right, this kind of permeates within the delivery that we do. So combining that, answer would be, there's macro room for growth in this industry. I think there is room to look at. And obviously, they are the (inaudible) areas, I expect are already sort of in our hands. You just need to kind of put my head down over the next couple of months and work with the team to prioritize the areas. The intention is to grow and grow hopefully better than what we have done historically. And for that, the organic and inorganic investments are sort of [again] for the right areas of growth. So I'll leave it at that at this stage and then come back in the next few quarters.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [8]

--------------------------------------------------------------------------------

Sure, sir. I think there’s some announcement regarding subsidiaries [shouldn't you have] to be parent company? So what is exactly happening there?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [9]

--------------------------------------------------------------------------------

Well, it's just a -- there is an intercompany debt between the, well, the U.S. and U.K. subsidiaries. And in fact, that is -- there's no need to continue that debt between the 2. It’s not with the outside world but it's between the internal. They have one cash surplus in the U.K., while we have got a cash shortage in the U.S. And we (inaudible) just trying to convert that into capital. It is that [nearly not going] to change any of the capital structure at the overall (inaudible) [within the group].

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [10]

--------------------------------------------------------------------------------

The U.S. is where cash will be invested by the parent company, yes?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [11]

--------------------------------------------------------------------------------

No. No, it's the U.K. which has invested the cash in the U.S., and we converted debt to the equity. So basically, now the India and the U.K. both will hold the U.S. subsidiary. (inaudible) 15%, 20% equity will be hold by the U.K. subsidiary.

--------------------------------------------------------------------------------

Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [12]

--------------------------------------------------------------------------------

And anyway -- so therefore the U.S. entity will become the [offshore]...

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [13]

--------------------------------------------------------------------------------

Absolutely. (inaudible) long term the investment has to be go through the U.S. [and through] the geography. So that's the reason (inaudible) actually. (inaudible) lower [leverage]. So it's [intercompany debt that is impacted through the site].

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question is from the line of Devanshu Bansal from Emkay Global.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Vipul, I extend my best wishes to you for the new role.

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [16]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

First of all, I would like to have a clarification regarding the margin guidance which you have given. [Probably], is that the EBIT level or EBITDA level?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [18]

--------------------------------------------------------------------------------

What is shown here is EBITDA level. So from a report on FY '19, we intend to grow [25] basis points in margin profile year-on-year.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

At the EBITDA level?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [20]

--------------------------------------------------------------------------------

EBITDA level. And because before the Ind AS adjustment. Post that, obviously the turnover would change so at -- as well as on a normalized pre-Ind AS.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

So that 50 to 75 basis improvement still remains on a normalized basis?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [22]

--------------------------------------------------------------------------------

That's right. Yes.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

Okay. So just to provide a little bit on the margins, so our offshore mix has improved quite significantly in this quarter. And still, on a normalized basis ex of some INR 9 crores investment which we made, our margins have declined 130 bps Q-o-Q. So what could be the possible reason for this?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [24]

--------------------------------------------------------------------------------

No. I think margin dropped -- I said 2 reasons. I think the Mortgage, which is growing due to the interest rate scenario. So we have, as of -- we we’re probably hiring -- every month, we're hiring 100 to 150 people for Mortgages. We are also growing in Utilities, U.K. customer [and India and prefund]. Both the locations where the growth is coming. There is approximately, I can give you around $1-odd million investment at the cost of growth, which -- as of today, in this profit and loss account for Q1.

As well as I talked there is still operating challenges in the U.K. market. We’ve talked about the attrition. And also there are some other pieces there are -- issues where I think we lost around [$750,000 debt]. I think the main 2 reasons, which is one is a good reason to have; another is I think we are trying more and more to control it. I think that's what we are trying to do.

Again, I think you must be aware that Q4, seasonally is strong quarter from the collection point and which dropped down in the Q1. So I think that is also the -- one of the reasons. But I think -- I believe much more the reason which really dropped our 1-year margin.

--------------------------------------------------------------------------------

Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

Okay. And last from my side, a growth outlook of 7% to 9% requires a strong (inaudible). So what's -- within the segments which we provide, which segments are expected to drive this kind of a growth?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [26]

--------------------------------------------------------------------------------

Yes. So I think that the last quarter, we also talked about where Collection is going to grow significantly higher in the normal company, expecting at least 25%, 30% growth on the Collections portfolio. Mortgage has surprised us too. I think we did forecasted that the growth is going to come, but I think the way the interest rates are undergoing change, refinance market is thus moving up again. We do see that, the good upside on that business is still coming in the Q2 and Q3 (inaudible).

Provider is doing really well. Payer, we already know that we're not going to grow that (inaudible) business as of today, but I think they delivered significant numbers for (inaudible) they're going to be quick. But I think they delivered better numbers for [us].

Customer Management, as I think we have talked about the Q2 when we are going to have there a sharp decline on account of a one-off at the Sky business that they've taken in-house. But I think against that, we were able to bring a lot of the other deals on the BFSI customer. But I think this -- all segments are going to be growing in a way we are looking it. But Mortgage and Collections is they're able to [deliver differentiated growth].

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question is from the line of the Dipesh Mehta from SBICAP Securities.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [28]

--------------------------------------------------------------------------------

A couple of questions. First, about the weakness in U.K. market. It's...

--------------------------------------------------------------------------------

Ankur Maheshwari, Firstsource Solutions Limited - Head of IR & Corporate Planning (M&A) [29]

--------------------------------------------------------------------------------

(inaudible) a little bit louder please? Sorry.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [30]

--------------------------------------------------------------------------------

Yes. Is it better now?

--------------------------------------------------------------------------------

Ankur Maheshwari, Firstsource Solutions Limited - Head of IR & Corporate Planning (M&A) [31]

--------------------------------------------------------------------------------

Much better.

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [32]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [33]

--------------------------------------------------------------------------------

Yes. So weakness in the U.K. market is [allocated], and considering the fact we have seen some growth in Utilities clients as well as the client also showing some stability this quarter. If you can provide some perspective what is leading to weakness in U.K. market and whether the high attrition which we are witnessing leading to, again, loss of business and volume for us?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [34]

--------------------------------------------------------------------------------

So the U.K. market, you're right. I think the attrition level which was (inaudible) in the last quarter, we did lose lot of money on the table. Current quarter, we've not lost the money on the table, but the cost is still a challenge because there are -- in order to deliver a similar volume, you may have [to hire] people, [so the] attrition is much higher. The cost became a challenge, but volume there a softness we have not seen. So I think U.K. been both challenged from a cost side and in the revenue side in this quarter at least. There, we don't see that there happening.

I think we're still [recruiting] the number of people, what we require. It is not that 100%. Probably, I think we have to hire -- again, we’ll probably end up with 80% or 90%. But still, the unemployment rate's high, [and low] is also (inaudible). But we're not seeing that we have lost significant revenue on the table...

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [35]

--------------------------------------------------------------------------------

A follow-up again, sir, in terms of revenue performance. U.K. still declined quarter-on-quarter despite having significant traffic, putting your utility clients [steadily gain top line]. So whether there are some accounts where we are witnessing. If I couple it with the weakness we're (inaudible) [2 2 5] seems there's some kind of weakness this quarter, so whether it is a kind of [reading] with this weakness in U.K. or if you can provide any more color.

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [36]

--------------------------------------------------------------------------------

I think the -- because utility customer is growing in the [Indian events] market. So utility investment which we used to be [at] in U.K. is stable or slightly lower. But I think the growth in the utility is more on a -- at a Indian [affiliate] (inaudible). And we do have, again, there are some ramp-downs taking place in the managed services, but it's not that significant because we [have other] growth has come. So we're slightly lower, but we're not witnessing the [lower side yet].

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [37]

--------------------------------------------------------------------------------

And Dipesh, to add to that, it's also a function of the U.S. market [growing] (inaudible) the U.K. market. So the mortgage [in the collections] (inaudible) for us. (inaudible) That is [a phenomenally done product] (inaudible) coming from the U.S. and against U.K. in Q1.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [38]

--------------------------------------------------------------------------------

And second question is about the digital business, which last time we reported around 9% of your revenue in FY '19. Can you share some number around how it played out in quarter 1 and how you expect it to play out in FY '20? And maybe over medium term how you expect the trajectory of growth there.

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [39]

--------------------------------------------------------------------------------

So we talked about that we want to grow internally. We took a target between 13% to 15% for the current year. Q -- we still come to [at a] 10% to 10.5%, and we see that -- I think that we will be able to achieve this 13% to 15% target [in Q2]. Well, now these days (inaudible) customer which will not have digital at one point because I don't see (inaudible) plain vanilla (inaudible) the market. We see that they're (inaudible) going to be. We (inaudible) -- we also thought on that the how we see the digital because coming from that portfolio, which was completely you can say the digital side of [this that we put to that].

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [40]

--------------------------------------------------------------------------------

So thematically, right? I think digital across Customer Management or newer ways of doing that this payer or provider or Collections or for that matter in Mortgage. I think that, that segment of the industry is growing faster than the traditional, right, by all measures. If you look at the end-user demand for digital services, digital experiences and digital processes, it's driving our clients to change the way they offer their core services to client or -- and just how they service them. So I think medium to long term, it is a sort of big, strategic opportunity.

RPA. Besides including RPA in the services we provide to our clients and embedding that as part of our solution, if it's a custom solution, RPA services for clients' retail operations is a massive opportunity. I think if you look at the licensing offtake, for the big automation platform, that's growing at a very rapid pace. And I think there is opportunity for the industry to build assessment and sort of automation services around it because we understand our client’s processes, it's about how we can help them automate that. Similarly, if you look at the opportunities for the born digital companies, right, the [Centerix], the insurtechs, right, pick any sector or [OTP], they present significant opportunity for -- because they come with born digital processes, right? They're native to digital processes.

So those are sort of early areas that we want to explore and make sure that a chunk of our growth in the future is coming from those. Now how we tackle them, which one we (inaudible) is something, as I said earlier, we have to put some thought to on where we prioritize and what would be our go-to-market approach for them.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [41]

--------------------------------------------------------------------------------

And the other question which I have about the margin outlook, where we are expecting expansion to play out. It indicates, considering the last year -- remaining quarters, we have a reasonably good margin profile. So if one needs to increase from full year perspective, your next 9 months' margin need to be substantially higher. So...

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [42]

--------------------------------------------------------------------------------

Absolutely. And so I think I talked about cost of growth, which will get normalized and which we'll have that better margin profile. And as you’re going to grow your digital side offering, (inaudible) make everyone aware of (inaudible) margin profile in (inaudible). We are very hopeful, and we are targeting to achieve these numbers.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [43]

--------------------------------------------------------------------------------

Maybe just from a strategic perspective, what would be your focus and drive kind of -- focus on driving a substantially higher revenue growth? Or you'll continue to focus on driving operating efficiency and margin and try to be (inaudible) kind of thing rather than, let's say, (inaudible) which you are [really used to]?

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [44]

--------------------------------------------------------------------------------

Yes. So look, I think in our business, we cannot go away from operational excellence, right? That's kind of an intrinsic part of our business because what we do for our clients in driving to start with cost efficiencies. And if you look at our clients, what's happening to a client? On the one hand, they're driving cost efficiencies in their traditional services or their traditional operating models. At the same time, they making room themselves for investing in digital products, right, or digital revenue business. So when we work with them, they'll expect lower and lower set of costs, right, from the industry standpoint, I'm saying. And we've got to make sure that our costs are competitive to continue to play into traditional segments. And slowly, as we build capabilities (inaudible) their own digital spend in the market, our opportunity will be to partner with them, right, cocreate with them. And as that sort of shift happens, I think you'll see more of that (inaudible) profile coming through. But clearly, where (inaudible) today, I think growth is an important aspect, right? The organization is in a solid footing. Good portfolio, very tenured leadership team, a pretty solid portfolio of [business] (inaudible). So I think growth. Yes, it's something that we want to drive hard while balancing with operational excellence to make sure that we are competitive in the market.

--------------------------------------------------------------------------------

Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [45]

--------------------------------------------------------------------------------

That's right. And last 2 data points. First is about the expected tax rate, what you expect. Maybe Dinesh can help me on that part. And second thing is about -- you indicated about INR 2.5 crores of one-off. If you can throw out some perspective what you reported at.

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [46]

--------------------------------------------------------------------------------

That was the Ind As, the accounting treatment with the new standard account. That has the additional charge for this quarter. And probably another 2 quarters, we'll have a similar number. But going forward, it will reduce or it will equalize because once you -- first time, out of that are initially higher interest cost in compared to the operating or rental charges you're taking, which is where the accounting standard [is paying.] So that's what the INR 2.4 crores, INR 2.5 crores I talked about.

Tax rate, I think we -- this should be within the range of 15% to 17% because I see that should be the rate, which is, I think, the first quarter also we're trending in (inaudible).

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Next question is from the line of Ruchi Burde from Bank of Baroda Capital Markets.

--------------------------------------------------------------------------------

Ruchi Burde, BOB Capital Markets Limited, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

First of all, my best wishes to Vipul for the new role. This question is for you. What is your initial plan of action over next few months before we start to ask what are the strategic [that you mentioned] or initiatives you plan to experiment with (inaudible)?

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [49]

--------------------------------------------------------------------------------

Yes. No, thanks, Ruchi. That question has been on my mind. But look, as I said, I have started to spend some time with the teams. I was down in our U.S. Mortgage operations last week. This week has been primarily in Bangalore and Mumbai. And then next week, I go on to meet our Healthcare teams as well as our Collections team and starting to meet customers after that.

My focus, if I could, in the next sort of few weeks is all about listening and understanding both our people and our products and, most importantly, our culture. I think in our business, it's an intense business, an operational business. In my experience, culture is very important. It acts as a great either an accelerator or decelerator depending on sort of what it is. So that's kind of at a principal level.

Clearly, we are at a juncture where we are, I think, in a good place to kind of start to focus on growth and growth investments, right? And I use the term investments generically, right? So my priority would be to identify growth areas both in current portfolio, adjacent areas and newer areas, and make sure we're making the right investments in the sales capacity and solutioning capacities to start driving that.

Clearly, there will be a lag between sort of by the time we choose, we invest and we see the results. But that's kind of the primary focus of looking for immediate and medium-term growth opportunities either within the segments we play today as well as evaluating new segments that we want to go.

--------------------------------------------------------------------------------

Ruchi Burde, BOB Capital Markets Limited, Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

That's great to hear. My second question is for Dinesh. So this quarter, we have maintained our growth guidance unchanged. To reach to the midpoint of the guidance really require something like 3% plus (inaudible) over next 3 quarters. And it's quite steep. In last 12 quarters, we did not have such a single quarter with more than 3% Q-o-Q growth. So I just want to understand. You are reiterating the guidance based on the concrete belief that we are [having the high]? Or we are counting on some pipeline to convert and then achieve the growth target?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [51]

--------------------------------------------------------------------------------

(inaudible) all of that that this is (inaudible). Coming into Q1, our (inaudible) sequential growth is on a back of seasonally strong Q4. I mean historically, if you take a look at what we have done, we have been flattish or declining in Q1 from Q4. So I think we're on a strong footing from a (inaudible) perspective.

Getting now into Q2 and Q3, there was very strong visibility in our Mortgages, Collections, provider businesses. (inaudible) there's been some good growth in (inaudible) customers. At least we're secure, the ramp up on right now. Obviously, (inaudible) is something which is going to be critical and all the best minds in the business are looking at putting (inaudible).

So today, we are [possibility] of meeting with them. And if anything changes, you will be the first to know.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

The next question is from the line of Manik Taneja from Emkay Global.

--------------------------------------------------------------------------------

Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

Just trying to [prod] a little bit further on the sustainable margins, what are (inaudible) business. So what we've seen in case of first quarter over the last few years is that they -- the low-margin segments of your business is like (inaudible) India. (inaudible) So given the kind of customer has remained a significant part of your business, what do you think is the sustainable margin profile of our business? And secondly, do you think the [price] towards, once again, a higher offshore delivery in the BPM business as well, has it done for a longer term? Or it might just be a near-term shift because of the hiring challenges that you've seen in the U.K. market?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [54]

--------------------------------------------------------------------------------

No. I think I didn't tell any U.K. has no linkage to the, I think, offshore because these are 2 different things altogether. I think the newer wins which we are expecting the utility customer and also the Mortgage side, as the mortgage is 80% in the offshoring. As we are growing in the Mortgage side, the offshoring is getting big. That is one of the main reasons, alongside after a long time, I think, utility customer [will talk], is very happy to be in India and Philippine.

We are seeing BFSI customer also slowly ready to go to the offshore. It can be that in-house a reason, [too, is close Brexit]. It is not a reason, FirstSource (inaudible) take their existing business to offshore. So I'm getting in new deals which are on the offshoring side. So I think probably this -- one of the banking customers which is with us from 2004, I think first time, I mean, they're [coming 400 and then 50] people requirement which we are there and discussing as of today, which is probably after 8, 10, 12 years (inaudible). It seems to be at a customer level also that there's needs coming up where they themselves must be facing the same challenges, as we are facing (inaudible). And that's probably the opening up. These are all long-term deals. I don't see these are short-term project deals which we are coming in the offshore market.

We are seeing a good traction. I don't want to comment that we will be getting into another 10%, 20% growth year. But I see the current momentum is very strong. Next 2 quarters, I have a growth pipeline which is already visible and the (inaudible) has been taking place. So I think that from that aspect -- and (inaudible) also the sense of being a margin profile. Because as soon as you grow in the offshoring side, our big margin profile is going to [get superior].

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [55]

--------------------------------------------------------------------------------

And if I can -- I mean this is Vipul, if I could just add on the offshore/onshore mix, right, if you think about our business relative to, say, other BPO, our competition, it has a bigger component of Customer Management, which in the last few years have been more closer to the end consumer philosophy by most of the Fortune 500 or 300 companies, right? They wanted that service closer to the base.

Now as multichannel, as self-service, as some of those technologies kind of come in and people get more comfortable with text and chat and stuff like that relative to voice, I think that mix thematically will change, right? And I think we are well positioned in that mix as it -- at a secular level as it change, that we want to harness that trend as well, right? So that's kind of -- I just wanted to add that comment that -- one is within CM what's going to happen. Then obviously, as we look to sort of areas we're pushing like digital in Collections or in Mortgage, that in itself will have a positive impact on the onshore-to-offshore mix versus our historical sort of portfolio (inaudible).

--------------------------------------------------------------------------------

Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [56]

--------------------------------------------------------------------------------

Sure. And if I can just pick your brain just a little bit further. You mentioned that this quarter, there was some impact of what's (inaudible). But given we are probably not too small now, probably between (inaudible) in revenue side, at what [point] do you think some of these elements will stop being a near-term headwind on margins because this will always going to be a part of the (inaudible) every few months we get some margin (inaudible). We will look to them get up. So when do we -- since we stopped seeing the (inaudible).

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [57]

--------------------------------------------------------------------------------

So let me start with the principal answer, right, again. And Dinesh will kind of have more specifics given sort of my sort of few days here. I mean if I compare it to sort of, say, the IT business or some of the more long-learning-curve, back-office processes, there is a sort of bench which is built into those businesses, right? And that allows you to even out sort of your ups and downs in demand versus supply, right?

Given the nature of our business, right, we manage it pretty tightly, right? And that kind of doesn't provide that cushion. I think as our mix changes a little bit, and, as you said, size should help to have that cushion which allows us to even out sort of this temporal movements between demand and supply. So just sort of thematically I wanted to draw the attention to the bigger and the comparison to the IT side. But Dinesh, you want to add?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [58]

--------------------------------------------------------------------------------

No. I think -- I agree that I think once we've grown to the -- this size (inaudible), probably not. But I think what happened the -- but we really see the quarter-on-quarter and we've tried to make the difference and [we've] probably every rupee discount or every dollar discount. So I think if we want to be as open and fair as we want to always come off the air and say this is what is happening. $1.5 million is not small from [a bid] profitability we are looking in the margin profile. We always want to call that out very clearly. That's our, I think, intent. It's not to showcase that we are not able to manage the margin because we have cost [of growth] but to put the real effect on the table, [that this more than] 1 million, 2 million, 3 million, where my margins are.

--------------------------------------------------------------------------------

Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [59]

--------------------------------------------------------------------------------

So Dinesh, just to broaden a little bit further on the margin front. So you talked about the 50 bps to 75 bps improvement at an EBITDA level. There is some benefit figure to the laws of India, accounting change at the EBITDA level. But some of more longer-term perspective apart from the mix of business [existing], the share of business that you're [calling out], what other levers do you think we would look to deploy (inaudible) sustain or improve our margin profile from here?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [60]

--------------------------------------------------------------------------------

I think cost side, we have done that. I think the major result, right, which we did in last 3, 4, 5 years, one of those, yes, you want to (inaudible). I think cost was one of the areas which we are really aggressive (inaudible) with the operating parameters through capacity utilization on those areas. Now I think the upside has to be through the margin expansion of better type of the deal which we need to be. And I think that's going to be the focus. 50, 75 basis point is just a -- I'd say this is a number per se it will be. But I think way we are looking at overall portfolio, I think every deal we are trying to see how we can build in the digital into that one, how we can put the -- all output-based or outcome-based pricing which always have a control in our hand to get the -- drive the better margin. So yes, I think that's all the focus on the table to be. I think you heard on the Collections side, digital collection is one of the offerings which is completely (inaudible). How many people really want to do a digital piece offering while I can really work in different [10% or] one computer than work 24 hours to give me the outcome. So I think those will be the more driver than in the cost side of it.

--------------------------------------------------------------------------------

Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

So just to understand that further, would the mortgage servicing business, along with some of the business that you're expanding now in Philippines and India, would that be a higher-margin profile business like compared to our onshore customer manual business?

--------------------------------------------------------------------------------

Dinesh Jain, Firstsource Solutions Limited - President & CFO [62]

--------------------------------------------------------------------------------

Absolutely. That's always been the case because margin in percentage terms, they are always going to be higher. Offshoring is always going to be higher-margin profile. And mortgage as you know, servicing is -- as of today the growth we're seeing is origination. There also those are high-margin [lending] services (inaudible). We will be able to deliver a higher outcome (inaudible) outcome this price. Offshoring, whether it's India or Philippine, it will always going to be a higher-margin percentage. So...

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

That was the last question in queue. I now hand the conference over to the management for their closing comments.

--------------------------------------------------------------------------------

Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [64]

--------------------------------------------------------------------------------

All right. Thanks, Ali. Well, thank you, everyone, for taking the time. And I know I'm kind of new and we'll have more fresh [conferences] as we get along. So I really look forward to sort of engaging with you and then start to sort of plan sort of individual connect with most of you, right, over the next several months as we go and building the relationship now going forward as you kind of continue to consolidate our business. So I look forward to connecting with you, and thank you for your time today.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, on behalf of Firstsource Solutions Limited, that concludes this conference call for today. Thank you for joining us. You may now disconnect your lines.