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Edited Transcript of FSL.NSE earnings conference call or presentation 4-Feb-20 10:00am GMT

Q3 2020 Firstsource Solutions Ltd Earnings Call

Lower Parel, Mumbai Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Firstsource Solutions Ltd earnings conference call or presentation Tuesday, February 4, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Devanshu Bansal

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

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Pavan Ahluwalia

Laburnum Capital Advisors Private Limited - MD & Director

* Pranav Tendulkar;Rare Enterprises;Analyst

* Rahul Jain

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Sachin Kasera

Svan Invest AS - CEO of Svan Investment Managers

* Tanmay Mehta

SBICAP Securities Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q3 FY 2020 Results Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I now hand the conference over to Mr. Ankur Maheshwari, Head Corporate Planning and Investor Relations, Firstsource Solutions Limited. Thank you, and over to you, sir.

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

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Thanks, Vikram. Welcome, everyone, and thank you for joining us for the quarter ended December 31, 2019, earnings of Firstsource. To take us through the results and to answer your queries, we have with us today Vipul Khanna, our MD and CEO; and Dinesh Jain, our CFO. We will be starting this call with a brief presentation, including an overview of the company's performance, followed by a Q&A session. Do note that the results, the fact sheet and the presentation have been e-mailed to you, and you can also view this on our website, www.firstsource.com.

Before we begin the call, do know that some of the matters we will discuss on this call, including our business outlook, are forward-looking, as such, are subject to known and unknown risks. These uncertainties and 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.

That said, I now turn the call over to Vipul Khanna to begin the proceedings.

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

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All right. Good afternoon, everyone. Thanks for joining. Hope the year has started well for everyone, although it seems like a long time, we're already into February. Times are flying by. So let me give you a quick sense from the presentation which Ankur referred, and then we can open up for Q&A.

So Q3 for this year has been a soft quarter for us across most parameters despite the traditional seasonality of this quarter. Our revenues came in at INR 10,535 million, which is quarter-on-quarter growth of 7% in rupee terms and 4.7% in constant currency. This translates to a year-on-year growth of 6.9% and 8.3% in constant currency basis. This growth has largely been secular across the segments that we play in, with Mortgage and health care scaling up well with ramp in new businesses. We'll give a little bit more color as we go along in this conversation.

Operating margins came in at INR 1,182 million, which translates to an EBIT of 11.2%. As you may recall, from the last quarter, we've said we'll start to use this as an operating parameter of our operating performance. At 11.2%, we have an increase of 239 basis points on a sequential basis and a growth of 35.9% in rupee terms. Year-on-year margins have declined by 66 basis points. And again, as we mentioned in the last call, this is largely on account of the investments for growth in digital that we are making relative to the last year.

Continuing with the same, profit after tax came in at INR 895 million or 8.5%. This represents a quarter-on-quarter margin expansion of 170 basis points and a year-on-year margin contraction of 150 basis points. And finally, this translates to a Q3 EPS of INR 1.29 as opposed to INR 1.41 in the previous year.

So in -- overall, our revenue and operating margin continue to track what we had set out for this year. Next slide gives you a consolidated view and the different line items for Q3 as well as the 9 months ended FY '20. The only thing I wanted to call out here is that our YTD 9-month operating margin has come in at 10.8%, which is at the lower end of what we had forecasted. So we already hit sort of the lower end of our operating margin in YTD December '20.

Quick, sort of qualitative comments. Our headcount increased to 20,482. Of this, 10,982 employees are in India, and the remaining 9,500 were outside India, which means about 481 employees added in Q3, and majority of this addition has been offshore across the businesses that we serve. We have been very focused in Q3 on strengthening our talent sourcing, especially in U.K., as well as increasing our retention. We are pleased with how the needle has moved thus far. Our onshore attrition has come in at 84 -- at 46% annualized compared to 55% in Q2. Some of the actions that we have taken are strengthening our operational and HR leadership teams. We've done some tweaks to our comp structure to make it progressive and linked to the skills which people bring to the job. And we're also looking hard at the recruitment mix across our business needs and across our centers there. A lot remains to be done, but we are happy with sort of the progress that we have achieved thus far.

On similar veins, offshore attrition came in at 36% this quarter as opposed to 40% in the previous quarter.

On the foreign exchange side, we have outstanding foreign exchange hedges of $36 million and GBP 83 million. And for the next 12 months, we have coverage of 60% in USD at INR 73.6 and 90% coverage for GBP at INR 101.9.

Let me give you a little bit of color by segments. So as I mentioned, all business units have grown quarter-on-quarter. Mortgage has led the pack and is about 19% of our total revenue for this quarter. The macro tailwinds with the benign interest rate environment continue to help the origination business across our clients, including (inaudible), strong demand for origination. And we expect this will continue for at least the first half of next financial year. But we are also as much focused on building the services side of the business. The services side grew 30% over this period, and it now contributes about 40% of our overall Mortgage business. And given the trend of digital that we've been talking since the last couple of quarters, we have early workings and ideas, a couple of business processes and service ideas in the Mortgage value chain. And given our continued push to go for the Mortgage value chain, we've also kicked off our underwriting academy to build the skill sets, both on and offshore, for this demand on the underwriting side. So coupled with the advanced skills and automation, we see sort of good sort of modes developing for us in the Mortgage business.

Collection business also scaled up well despite the seasonality of the headwind of the holiday season. The digital collection product continues to do well, and we're seeing good traction in the card and the traditional student loan market that we play in. We're also starting to see some early push into the fintechs for taking our digital collection capability.

On the industry verticals, coupled with sort of strong growth in Mortgage, Collections as well as the U.K. BFS portfolio, BFSI is now nearly 43.7% of our total revenue, right? It continues with the trajectory, if you look at the slide in front of you from last year to last quarter, and now this continues to be strong and is now the largest vertical we have. Others are also growing, but in the overall scheme of things, the percentages start to decline, but overall, we've kind of shown growth quarter-on-quarter.

If I take a quick view across the geographies, the U.S. is now 63.3% of our revenue, U.K., 35.3% and others is 1.4%. Clearly reflects the growth in Mortgage and Collections businesses, which are primarily North America for us today. And also, that's the larger market. But we are as much focused on U.K., where we have our strongholds in the CM area, and we see a good deal pipeline in the CM as we kind of look at now and sort of the next quarter or so.

By delivery, offshore is now 25.2% of our total revenue and onshore, which is U.S. and U.K., is about 74.8%. This is by design. As we look towards CM, health care and Mortgage businesses, we are conscious of growing our offshore portfolio, given the superior margin profile that, that business has. As far as client concentration, kind of the same as before. Our largest customer, there is an element of stability. We have some -- a couple of smaller ramps going up with them. We've engaged with them on the whole attrition and retention situation. So the comments I made earlier about the progress there also bakes in sort of the results for them. So there is good sort of alignment there. And we don't expect any surprises in the near term from that account.

Let me quickly close by giving a quick sense on the business outlook, and then we'll go to questions.

So this quarter, we added 3 new logos in Mortgage and 2 in Healthcare Provider, and obviously, growth continued in our existing accounts as well as the previously won deals as we ramp them up. Deal activity is strong, especially as we look to continue to reimagine our CM offering and bring in (inaudible) in our deal flow as it got recognition by the industry and our clients on digital solutions, and we've won a number of sort of prestigious awards with our key clients on our digital

(technical difficulty)

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Operator [4]

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I'm sorry to interrupt. This is the operator. We're not able to hear you, sir. I will just reconnect your line.

Ladies and gentlemen, kindly stay connected. We will reconnect management line. Ladies and gentlemen, thank you for your patience. So we are back in the conference. Go ahead.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [5]

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All right. Can I just -- let me just repeat the last slide to make sure there was no loss. So as I said, we had good traction in Q3. We had 3 new logos added across in Mortgage and 2 in health care. As we continue to digitalize our CM offering, we're seeing good deal traction there, and it's also being recognized. We won a couple of good awards in the U.K. for our solutions for NOW as well as Get Cash. And also recognition in the U.S. from our health care automated audit solution. BFSI, health care and Utilities continue to scale well. We see the momentum going into sort of next quarter.

As I've been saying, digital is a key focus, a couple of areas to report on. Our Chief Digital Officer, Sundara Sukavanam is on board, and his primary focus will be to build a practice for intelligent automation and analytics as well as work with business leaders to develop digital offerings. So digital collections is an example of a digital offering that we're going to take on. And as we look to other ideas across our businesses, he will work with business leaders to translate that into (inaudible) solution. As I mentioned, digital collections is getting good traction. We have a couple of interesting dialogues with Fintechs, right, to help them on the collection side using our offering. And I'm also happy to report that our digital collection offering has now been adapted for the health care receivables management. With our first anchor customer, we've implemented it, it's gone well. And now the focus is to take it to the broader market.

Finally, for the FY '20, our revenue growth is likely to be around 7.5% to 8.5%. We had earlier given a range of 7% to 9%. As we come to sort of the last quarter, we've narrowed the band to 7.5% to 8.5%. And operating margins, we had given you guidance of 10.8% to 11.2%. We've kind of taken the lower band up, and now we are forecasting between 11% to 11.2% for the full year FY '20 as far as operating margin is concerned.

That's all I have. Let me open it up for your comments and questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Nagraj Chandrasekar from Laburnum.

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Pavan Ahluwalia, Laburnum Capital Advisors Private Limited - MD & Director [2]

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Vipul, this is Pavan. Couple of questions. First of all, it's great to hear that you've put the digital head in place. There were a couple of other positions you mentioned you might be looking to fill, specifically a U.S. sales head, a head of CM and an overall delivery head. Any progress on those hiring decisions? And over what period of time would you be putting these individuals in place? Also, if we could get a little background on the digital -- on, I think Sundara, and why you think, I don't know if it's a man or a woman, whether they could -- why they'd be a good fit for this role? Second, on the cost issue at Derry that had created problems last quarter. Just -- obviously, we've seen a margin normalization because some of the one-offs last quarter weren't there this quarter. I'm just curious about how we see that cost situation evolving at Derry. Have we been able to put in place levers that might mitigate that? And then finally, as we move in the next several months to potentially build out parts of the organization that have been underbuilt, is it fair -- which, obviously, over time, will expect us to achieve a higher revenue growth run rate than what we've achieved so far, do you expect that we'll be able to maintain margins roughly similar to what we're doing right now? Or do you think the steady state margin adjusted for the reinvestment you need to do in sales, business development, platform development, all of that could be significantly lower than present margin run rates?

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

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Got it. Thanks, Pavan. Let me try to address the question that you raised. So Sundara, he is a male. He is based in the U.S. He has a deep background of selling technology services. He's been part on the -- of the CIO organization, so the user organization to take some of the new tools. And for the past few years, he was running the intelligent process or RPA practice for Cognizant. To build -- that was his responsibility. As we brought him on, clearly, RPA, as we're calling it, or intelligent automation, it's holistic, it takes care of intake, automation, workflow capabilities. And then as the world evolves to machine learning and AI, kind of across that spectrum, we have the capabilities and partnerships to help our clients whether on outsourced contracts or retained operations, right? So that's one focus that he's going to drive. And second, build partnership with SaaS platforms so we can start to think of pretty specific (inaudible) ideas to take to our clients. That's his background and mandate.

On the other position, we made good progress. I expect between sort of now and end of March, a couple of other key positions to join in, and some will overflow, given some of the geographies have longer notice periods. A couple of more positions will flow into Q1 of next year coming on board amongst 3 or 4 that you outlined. So those are your first 2 questions on the leadership team.

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Pavan Ahluwalia, Laburnum Capital Advisors Private Limited - MD & Director [4]

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So sorry, just to clarify, the full -- so by June, you will expect all of these to be filled?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [5]

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Yes. Barring any unforeseen, yes, majority of the leadership positions should be done by end of Q1 next year.

Now as far as U.K. and Derry, et cetera, is concerned, as I mentioned, a few examples of actions that we've been taken very close, hard look at who we're hiring, how we're engaging them, how we're measuring them, how we're paying them across the life cycle. Some of the actions were -- are kind of long ranging, right, and they will play out in this year, in sort of calendar year '20. We were very focused on making sure that we were harnessing the growth opportunities, we were not doing any revenue leakage as well as meeting our service commitments. So that was our priority focus in Q3. I think they should start to play better and the financial sort of upside that we expect from some of these actions on revenue and margins, I'd expect that to start to play through in the next couple of quarters. First, Q3 was very focused on making sure that we met our commitments, and we captured the opportunities that were up there. But it's a long haul, right? We are very focused, a lot remains to be done as far as attrition and operational resilience is concerned of our U.K. operations, especially so that if we have -- not if, we have a decent pipeline of growth opportunities and I want to make sure we have the right foundation to be able to harness and deliver on those opportunities.

Last comment -- or the last question you had was on the margin going forward. So again, as I had said, we've taken in -- we modeled in an element of investments for growth, both in terms of leadership as well as sales capacity in the forecast that we had set for March of '20. How it plays out in next -- next year, that budget work, we have just started. And hopefully, when we come to the end of Q4, we'll have a better position for outlook for next year, baking in the growth investment as well as how much we can harvest from operational excellence in our existing portfolio.

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Operator [6]

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(Operator Instructions) We have next question from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [7]

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Sir, just a couple of questions from my side. If you can provide some perspective about industry outlook. So how you look BFSI; health care payer, provider side; telecom; media? And then to some extent, if you can provide perspective on the health care customer management. Sir, how do you expect next quarter as well as next calendar, if you can provide some perspective? Second question is about the seat fill factor. This quarter, it seems to be much higher, 87%, which is, historically, we have generally remained below 85%. So this quarter, it seems to be unusually high. So if you can provide some perspective there. Third question is about CapEx. First 9-month CapEx seems to be on a higher side. So if you can provide whether it is largely growth CapEx and likely to continue going forward. Or there is some one-off which led to a higher number in first 9 months? And then related question is about if you can provide OCF and FCF number, operating cash generated in first 9 months and free cash flow in 9 months. And the last question is about Brexit. How one should look Brexit? Any kind of implication if you can quantify or qualitatively provide some perspective.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [8]

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Dipesh. Thanks for the questions. Let me see if I remember all of them. So let me start with CapEx. So CapEx is uniform, largely for funds -- or servicing growth. And it's spread across. There were some U.S. investments for Mortgage. A lot of India investments in Bangalore and Chennai to service growth for Mortgage as well as some of the health care accounts. And also some expansion in U.K. given some of the deals and extra orders we had. 1 or 2 are just extensions of our centers to add new capacity. So in general, pretty much all is new center growth to service growth is where the CapEx has gone.

Industry outlook. BFSI, obviously, is the biggest sector for the outsourcing world. It tends to consume and use it. It's a very sophisticated and mature buyer. And to that extent, they are at the leading edge of embracing newer trends like digital and experience and stuff like that. We continue to grow that. We continue to modernize our offerings to be able to serve them. But to your question in terms of demand, the demand is shifting to newer offering. Retail banking, insurance, both are asking for the next-generation customer experience. And to that extent, having those capabilities to play in the change spend, not just the run spend, is an opportunity for us as we look forward. We'll achieve that through people like Sundara and team that will join, but also by partnering with sort of next-generation platforms and embedding those platforms into solutions. And in this regard, we've already signed up a couple of partners to embed their solutions in our offerings.

Health care, again, break it down between provider and payer. Provider is going through significant change in the U.S. That's primarily a U.S. market for us. Consolidation, value-based care, self-pay, these are the big sort of megatrends out there. And hence, as we look at our offering of making eligibility at the core of our offering, modernizing it to make it more digital, extending self-pay making sure our product engages the consumers, that's kind of another trend that we're trying to play into. So in terms of outlook for Healthcare Provider, I think it is going through significant change. And I generally believe it creates an opportunity for players like us to take their domain knowledge, stay very focused on extending that capability, both in terms of value chain as well as modernizing the offering, to capture a larger share of the wallet as far as the provider world is concerned. We're also seeing significant private equity interest in the provider space, right? Companies with self-health care providers, they are attracting a lot of investment, both in technology and operations, which kind of shows the validation of the opportunity in the Healthcare Provider space.

C&M. Clearly, it's colliding. You see big players are now transcending across communications, media and increasingly behaving like tech companies. So we also want to combine it and run it like a CMT vertical, comms, media and tech, make sure that we are able to meet their traditional needs as well as the newer needs. Again, early days. I need time to kind of build that capability and come to you. But things like ad operations and content management are growth areas, even for traditional comms and media players as we look at that sector evolving. So I feel good about the sectors that we play in and what's happening there. Obviously, we are on a change and investment curve to make sure that our offerings capture the newer opportunities in those sectors.

Dinesh, anything on the OC and -- operating cash flows and free cash flows?

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

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I think current quarter we have generated around $15 million of cash flow. And we -- I think, free cash flow is around $8-odd million, which we use for the repaying the short-term borrowings. I think that's the number for the quarter.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [10]

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Dinesh, I was more looking for 9 months.

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

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9 months. Okay. I think the range is around $30-odd million is the total cash flow generation. And I think that most of them got utilized to either repay the short-term borrowing or utilized for our dividend payouts. So I think from 9-month point of view, I think that most of the money is being used for borrowing repay and dividend payouts. That's all.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [12]

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Okay. Last question, Dipesh, you had was on Brexit. Let me offer a few comments on that. First, if you look at sort of how is it playing out. Clearly, more decisiveness in terms of the political action. What it means in terms of policies and specific actions is what's in store for the next 12 months as per their calendar, right, as per the government's calendar. Impact on business is if you think about it, U.K., despite the uncertainty of Brexit, had a strong economy over the last 3 years. With the new government talking about increasing spending, making it more regionally spread rather than just centered around London, I think the economy should grow stronger as they make better position on infrastructure investments or sort of other skill-building areas in the developing parts of U.K. I think we play in some of them. That should benefit. And in general, as the economy kind of props up, right, our customers play largely, whether it's media or banking on the retail side of it, right? So that should have a good positive impact from a demand side.

Conversely, as labor market continues to be the way it is, which is historically low unemployment rate, I am seeing more appetite, especially in Utilities sector, and increasingly from banking as well for embracing more offshore solutions. And it's also helping that as the world shifts a little bit more from voice to chat, it kind of opens up opportunities from onshore to offshore thing as well. So kind of working in multiple ways, stronger economy, better regional growth, tighter labor market. So demand side, I think, should play out well. And on the supply side, it opens up more offshore demand. And then it's up to us to kind of execute well on our solutions and in sales to be able to capture a portion of that demand.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [13]

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Sure. Just a couple of follow-ups. First is about the payer side. I think you touched upon about provider in healthcare. Payer, earlier, we have seen some challenges in the beginning of the year. So how the payer is playing out and your expectation about the next few quarters? Second question about the seat fill sector, which I earlier asked about. It is -- seems to be very high. So any specific reason is driving it? Or now considering operational excellence, you expect it to remain high going forward? And the last question is about is it possible to say 9-month constant currency y-o-y growth?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [14]

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Okay. Sorry, I missed some there. So let me give you a couple of fair comments, right? So from an industry sector standpoint, a couple of comments. One, a lot of consolidation continues to feed the payer sector as well. Second, Medicare and Medicaid, which is government-sponsored healthcare plan, continue to be the growth drivers of the U.S. health care market. And plans which have strong presence continue to make strong progress as well as a number of other plans who were not in government or who are providers and want to be pay-viders continue to kind of come into the Medicare and Medicaid world to capture a share of the spend that's out there. We have a reasonably strong portfolio. Although I would say that we do need to kind of step back and think about what are the growth opportunities that we want to pursue. And I think part of my endeavor will be to come to you in the next couple of quarters to say in that changing landscape, given our profile, what is sustainable growth pool for us. I need some more time to come back with the specifics. But I think I like the fact that government is growing. And beyond traditional services, when we look at analytics, when we look at some of the middle office services, those seem to be early ideas of us trying to capture a share in those markets. Dinesh, on the...

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [15]

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Dipesh, on the seat fill factor, I think you're aware the last quarter, we talked about that for mortgages, we are setting up a center in India and also in the U.S. So current quarter, I think most of those seats were filled as you can see that in revenue upside and the -- which have taken place. So I think the seat fill factor is clear indication of the growth which is coming on mortgages and the utilization of the empty seats which we had.

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

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And Dipesh, to your question on the 9-month year-on-year, it's 6.1% on constant currency basis.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [17]

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And we have guiding around 7.5% to 8.5% for the full year.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [18]

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That -- correct.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [19]

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So we exit reasonably strong because last year, Q4 was a reasonably strong quarter for us.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [20]

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Correct. So the seasonality will help. Plus, looking at sort of the contracts under implementation, we think we'll be -- we are reasonably confident about the 7.5% to 8.5% range that we have at this point in time.

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Operator [21]

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(Operator Instructions) We have a next question from the line of Devanshu Bansal from Emkay Global.

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Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [22]

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Vipul, congrats on strong execution in the quarter. So my question is we are already doing quite well on the Collections and Mortgage business segments. The only area not growing for is the CM part. So the focus of new hires, or those which are going to be hired, is going to be on the CM side? Or to build new capabilities in the fast-growing segments? Or to develop new avenues of growth for you guys?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [23]

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Thanks, Devanshu. So you're right. Mortgage and Collections had a strong quarter. CM, while optically, year-on-year, it kind of looked flat, but partly, we have talked about in the past, that was the -- some of the Sky reallocation of portfolio, which played out in the first 2 quarters. But in terms of -- if you isolate for that, it's growing reasonably. And I feel good about the pipeline that we have. Clearly, bringing in new partners and bringing in new skills to be able to give more contemporary offerings with digital, CX and stuff, that is the focus here. That is one focus of bringing new skills, both in-house as well as partnerships. Tax is an aspirational area. We have started to kind of think about where do we start. What can allow us to get a fast track start in a newer sector like fast-growth tax? Fintechs is one area. Content is the other area that we're starting to poke around on. And clearly, our current strengths are both customer support and product support that we start with, and then we kind of extend into the service value chain. So yes, both in terms of building capabilities and bringing sales capacity to target that is a focus. And I'm looking forward to closing some of those hires this and next quarter.

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Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [24]

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So Vipul, can we think of building capabilities through inorganic means as well? Do we remain open to those opportunities?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [25]

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Absolutely. So Devanshu, I think, the way I'm thinking is that we need a fairly systemic M&A program. We have laid out our vertical focus areas as well as service focus areas, like digital and CX and Collections. Within that, our endeavor is to have a good visibility toward targets, which could add capability to us, either in terms of service line or go-to-market in geographies or sectors that we're not there. But early stage, nothing specific, but at a philosophy level, at a strategy level, we do want to look at it systematically as an accelerator for our capability build or GTM. Yes, definitely on the cards.

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Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [26]

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So Vipul, not asking for a quantitative guidance as far as FY '21 is concerned. But the way we have guided for the fourth quarter and a good -- which is expected to be on a good y-o-y run rate, so FY '21 seems to be much better than FY '20. Your comments would be really helpful on this.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [27]

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Sure. So yes, Q4 looks reasonably strong at this point in time. As I mentioned, Mortgage has been a standout performer. Hopefully, next couple of quarters, the momentum on the origination side will continue. And after that, we'll see how the economic environment develops. So there is that element to kind of consider. Also keep in mind, Q4 is historically strong for us in Collections and health care, both. So some of that will taper off as we get to sort of Q1 of next year. So it'll be a little bit of a mixed bag. There should be positive tailwinds from our strong CM pipeline at this point in time. Again, it's a pipeline, we'll see how much we kind of net out in terms of wins out there. But yes, I kind of acknowledge the sentiment that next year should be sort of in line with or slightly better than what we have seen in FY '20. But again, early days, we'll do more work. We just started the budgeting process for next year. And as we come to you and 3 months later, we'll give you a sense of how next year looks like.

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Devanshu Bansal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [28]

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That's encouraging, Vipul.

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Operator [29]

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We have next question from the line of Sachin Kasera from Svan Investments.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [30]

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Congrats. Nice to see growth coming back after some few sluggish quarters. And very nice to know that you're looking at a stronger ramp-up as we go ahead. Just a couple of things. One, when we see the segmental reporting that we have done, while certain segments like (inaudible) Mortgage, we have seen very strong growth, but not seeing any major margin expansion. So in fact, we see most of the segments the stronger the margins (inaudible), mainly because of the investment that we are doing. And as we go ahead, some of the segments will start to show margin expansion? How should we look at it?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [31]

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Sachin, thanks for your comments. I think your observation is right. Mortgage has been a little bit of a scramble to capture demand. Most of the clients have come back with strong demand, and it's about making sure we are able to hire the right skills in the right geographies. So bulk of the margin has gone towards building those capabilities. You can't perfectly time the hiring relative to demand, right? So you're kind of scrambling at that point in time. I'm hoping that we'll be able to balance it better in this quarter and sort of as we go into next quarters. Also, inherently, origination is relatively low margin than servicing. So at this point in time, that's what's growing. But as I mentioned earlier in my comments, we are very focused on making sure, in the background, we're building a strong service portfolio for the clients for whom we're doing origination. So I think as we continue to build our servicing portfolio, that should auger well for our margins as well. But at this point in time, cost of growth and somewhat the lower margins of origination are what's playing out in our margin performance for Mortgage.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [32]

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Sure. Second question. Coming to the guidance for 7.5% to 8.5%. You mentioned that we had done some 5.5%, 6%, I think, for the first 9 months, right?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [33]

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6.1%.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [34]

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6.1%. So if we -- while 7.5% itself would mean a very strong Q4, 8.5% would mean a very, very strong quarter. So are we looking at some significant deals in the Q4 (inaudible)?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [35]

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No. I think it's partly the seasonality, right? Historically, we see Collections kind of picks up. Health care picks up. Mortgage, we expect to continue sort of the run rate of Q3, right? So that will kind of play out there. CM is coming on a little bit of operational resilience. So hopefully, it will deliver more consistently on the revenue. When you add all that up, is where we look at sort of Q4 coming in to kind of hit our overall numbers of 7.5% to 8.5%.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [36]

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And same is the case for margins? Because I think we have done 10.8% in the first 9 months from what I can see in the fact sheet.

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

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Yes. Correct. Correct.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [38]

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On the client concentration. The top 5 has increased from 13.5% to 42%. So what has driven this? Any specific focus or some deal renewals or deal wins with existing clients?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [39]

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No. Mostly, it's been the growth in our Mortgage portfolio. So our top client in Mortgage, that has shown significant growth. So while our top client has remained static, the fact that Mortgage grew up and back to a chunk from the largest customer, that's showing up in the numbers as we have.

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Operator [40]

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We have next question from the line of Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [41]

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Sir, what is the net cash on the -- net cash or net debt on your balance sheet? And what is the CapEx plan for next year?

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

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Madhu. CapEx plan, the next year also, we're looking at same around $12 million to $15 million. I think that's the normally way. I think $10 million to $12 million is normal, looking like the growth which we have and I think the -- sort of the digital intervention probably will continue to -- in that range of being $10 million to $12 million. Cash flows, I think, I talked about, I think the -- for 9 months, we did almost around $30 million, $35 million cash flow. And I think that after the paying dividend, the balance we use for a borrowing to repay. There is no long-term borrowing in the company. Most of them is just a working capital line, and which, as of today, is around INR 500 crores for us.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [43]

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The net debt, sir? Net debt? What is the net debt position?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [44]

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Net debt should be INR 500 crore, sorry. That gross debt is around INR 630 crore, and INR 130 crore is the cash in the company.

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Operator [45]

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We have next question from the line of Pranav Tendulkar from Rare Enterprises.

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Pranav Tendulkar;Rare Enterprises;Analyst, [46]

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Sir, can you just highlight what are the margin levers remaining for the next year? That is one. And if I missed this, growth outlook for each of the verticals?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [47]

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So from a margin standpoint, I think automation, with sort of our continued focus on digital and automation. One is sort of developing automation as a service line to offer it to clients on their retained operations. That's an opportunity. But also deploying the same more consistently across our portfolio, that's one focus area that we're looking at, especially where we have outcome-based contracts. So there is an equitable distribution of margin from automation between us and our clients. That's one lever. Second, I think we continue to look at offshoring very discretely to say that as we chase deals, especially in CM, we're able to have a bigger share of those deals which have the offshore component because the margin profile is slightly better than those deals. So that's our second potent lever from a margin expansion standpoint. And third, in general, although it may not show up, I guess, in the next few quarters because it's still in the build phase, as kind of scale builds up, both in operational leadership as well as SG&A, at some point, I'd expect the scale leverage to start to play out. But that's kind of more medium to long term rather than short term.

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Pranav Tendulkar;Rare Enterprises;Analyst, [48]

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Right. Sir, and good visibility or growth outlook for the quarters qualitatively, I'm not asking quantitatively, versus last 12 months?

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

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So yes, to that comment, Mortgage, as I said, will continue with its sort of current trajectory, right? We expect current volume levels to hold up as in Q3. Collections, a seasonally strong quarter. Provider, we are, besides sort of delivering on what we have, put in a lot of focus on our digital eligibility services as well as the newly launched digital collections product. Again, meaningful revenue will follow, it may not be sort of in the short term. But I think in the medium term, it kind of presents -- shows us well to capture the opportunity besides the traditional opportunity that we're doing in provider. Payer, I need more time to come back with sort of how we play in that market, as I've said earlier. And then finally, on CM. I think Q4 will be kind of run rate. But as we go into next year, if the pipeline continues well, we should see a stronger CM with a more contemporary offering playing that out.

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Operator [50]

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We have next question from the line of Rahul Jain from Dolat Capital.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [51]

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Congratulations on a very strong quarter. You remarked about the kind of efforts you are taking to bring down the attrition and bringing it par with the capabilities. So what are the kind of headwind we would see on the -- our wage structure? And what are these things that you are implementing?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [52]

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Yes. No, great question, Rahul. So look, it's a holistic action. Attrition is a complex topic. From who we hire and how we engage them and what we pay and how we pay, all kind of goes into that factor. We're trying to be innovative so that it's not just a blunt retention or a blunt wage hike, but it's a more targeted sort of intervention to show a skill-based or a tenure-based compensation structure is a philosophy that we're trying to implement as far as compensation is concerned. The good thing is that most of our contracts have indexation to the National Living Wage in the U.K., right, where bulk of our CM business is. So as that moves, our baseline kind of moves in tandem as far as that is concerned. Our focus is on -- to the point on wage is to be smart about sort of how we spend the money as far as comp and benefits is concerned, but also focus a lot on the engagement part of it, right, the things around the wage, right? The facility quality, the engagement with employees, showing them the purpose, right, the engagement calendars. So a lot of them should give benefits on retention without necessarily too much drag on the wage costs there. That's kind of how we're kind of looking at it. Does that give you a sense?

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [53]

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Yes. So you are saying it's more about an HR activity rather than putting more dollars into the thing.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [54]

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A mix of both, yes, a mix of both.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [55]

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Yes. Okay. And do you think in our kind of a business model it is the right tool? And also what I probably understand is that in our lot of business, especially on the outcome-based model, we have a good participation for the executives. So is that a more relevant way to attract or retain talent? Or you think the other way things -- other ways are more potent, too?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [56]

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No, fair enough. Look, so some of the contracts, there is the opportunity, especially sales contracts or Collections contracts, which are outcome-driven, we have the opportunity to show a higher variable weightage to our employees. The more they perform, whether selling or collecting, they're able to make more. And we see that behavior playing out differently. But when I look at service side of it or the chat side of it, right, where the contract is harder to measure outcomes, and that's kind of pretty much the industry norm, we're not in isolation, that's where it gets to more either operational performance or tenure and some other factors to which you try to link the variable pay. So as I said, there is no one perfect answer. It's a balance of engagement. It's a balance of how we pay them and is a smart way. And then making sure they are bought into sort of what they're trying to do for themselves as well as for the client itself. So there's kind of a balance up across, also varies per the nature of the contract, sales collections versus service contracts.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [57]

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And lastly, on the same thing. Do we even intend to put ESOP as one mechanism attached to it? Or we are not considering that at the moment?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [58]

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So we do have an ESOP plan, mostly for our senior and middle level. I think to make it meaningful, we continue to plan it at that level only and not take it down to frontline leaders and our customer service officers.

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Operator [59]

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We have next question from the line of Tanmay Mehta from SBICAP Securities.

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Tanmay Mehta, SBICAP Securities Ltd., Research Division - Research Analyst [60]

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What will be the ETR for FY '20? And do we share any number around the deal wins, like TCV or something?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [61]

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So the ETR will be between 13% to 15%. I think that's what the rate is going to be. But again, the last quarter, so probably all -- most of the deferred tax adjustment, a lot of them happens in the last quarter. But it will be between 13% to 15%. And normally...

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Tanmay Mehta, SBICAP Securities Ltd., Research Division - Research Analyst [62]

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Is it the same -- sorry, sir, it will be the same in next year as well for FY '21?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [63]

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Next year looks to be similar level because I think that as we are seeing that a lot more growth coming on the offshoring side, too, and again, a new center basically set up and most of them are in SEBI. I see that I think the range will remain the same. 1% probably here and there, but I don't think it's going to be materially moving from, at least that's what I'm guiding.

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

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And Tanmay, your other question, this is Vipul, on deal wins. This quarter, we had ACVs of, give or take, $20 million. I don't remember the specific number. It's about $20 million, but that's ACV.

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Tanmay Mehta, SBICAP Securities Ltd., Research Division - Research Analyst [65]

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Okay. And if you could share for the 9 month as well?

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [66]

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I don't have that handy. Can give it to you off-line.

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Operator [67]

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We have next question from the line of Sachin Kasera from Svan Investments.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [68]

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Yes. Sir, just 2 small data-keeping questions. One, what is the net debt figure as on December versus March?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [69]

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So March 31 was INR 390 crore. And as of today, on December, we are at INR 500 crores.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [70]

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So the net debt has gone up primarily because of the dividend payout?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [71]

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Dividend payout, no. I think the CapEx expense is much higher as well as I think if you really see the net debt level have increased. On the number of days this is lower, but I think at unbilled levels, we have slightly higher. We see that getting normalized in Q4. And Q3, seasonally, when the holiday season, provider or payer, I think the collectability is slightly low level. But we don't see that further increasing on a year-on-year basis, probably it'll be at a low end of -- or probably between around INR 400 crores will be the net debt on March 31, '20.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [72]

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Okay. And then, in that case, sir, how do we see FY '21? Should we -- do we see net debt going down? Or it will remain at these levels?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [73]

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It has to be the -- I think the -- it should drop down. Till that time we don't do any materially M&A transaction, I think all the cash we generate. We expect at least between $20 million to $30 million of net cash surplus we should do in the coming year easily. And I think that's should drop the -- what we capitalize.

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Sachin Kasera, Svan Invest AS - CEO of Svan Investment Managers [74]

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And sir, just one question on the dividend payout. Is there any change in the time type? Last 2 years, we have a dividend policy sort of in place. This is probably going to remain the same? Or that's also something that we're going to have a relook as we move ahead?

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Dinesh Jain, Firstsource Solutions Limited - President & CFO [75]

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We did not have any discussion -- we've not heard from the Board level, so dividend policy what we have as of today remains intact. There's no change in that.

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Operator [76]

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Thank you very much, sir. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over Mr. Vipul Khanna, MD and CEO, Firstsource Solutions Limited, for closing comments. Sir, over to you.

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Vipul Khanna, Firstsource Solutions Limited - MD, CEO & Additional Director [77]

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Great. Well, thank you, everyone, for your time. Great questions. Enjoyed the conversation. We are hard at work this quarter, a lot of work to do, both in terms of servicing the business as well as growing it. So look forward to your increased participation and questions to us. And we'll come back in the next 90 days to report how Q4 was. Thank you very much.

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Operator [78]

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