FSL — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Firstsource Solutions Limited Q1 FY'23

Thank you very much.

We will now begin the question and answer session.

The next question is from the line of Divyesh Mehta from Investec.

Please go ahead.

Divyesh Mehta

My first question is, can you actually share again the guidance decline, where is how much basis point impact coming from Mortgage and Collection?

And also, can you share accounting standard, what was the impact coming from this change?

Vipul Khanna

So, the guidance revision, about 3.5% to 4% is coming from Mortgage and about 1% is coming from Collections, which is primarily from trimming of the growth expectation in H2 of the year.

On the impact of the accounting standard change, we expect this year that will positively impact our operating margin by 80 to 90 basis points.

Divyesh Mehta

So, my next question is that in the credit card repayment business, the delinquencies, as you said, are increasing.

But if you look at the various banks commentary, all of them have been highlighting that customers now have a larger chunk of saving a bigger cushion.

So, they are not expecting a big change in that number.

So, what is driving your reasoning that repayment side can see a strong growth?

Vipul Khanna

So, both things are happening, right, as I mentioned, for the last three quarters, from the very lows at the peak of mortgage where people had a lot of surplus cash, delinquencies, quarter- on- quarter have been increasing.

At the same time, people as the spend has increased, you will see more of that sort of coming through in the delinquency rates.

We had anticipated volume growth.

We have been continuously calibrating with our clients.

That's partly the reason we have recalibrated down some of the growth expectation, but we still expect there will be additions and increased volumes coming through to us.

And the second factor is, since as I have been mentioning, we have been adding new clients in utilities, Fintechs, etc, as those implemented and as those volumes come through from us, right, as you have new client, they slowly start placing more volumes from you, that balance kind of builds up.

And as that builds up, those two factors combined are what are driving our Collections forecast.

We have been careful in incorporating how much lift we take from existing clients.

And that's the balance we have been trying to strike in our forecast.

Looking at the volume flow today I have and we look at the guidance from our clients. © Firstsource Solutions Limited

Divyesh Mehta

One last question.

So, when you said that 13% to 15% of the business will be Mortgages that was by end of FY'23 or for the whole FY'23?

Vipul Khanna

So, for whole of FY'23.

Moderator · Conference Operator

Thank you.

Manik Taneja from JM Financial.

Please go ahead.

Manik Taneja

So, my first question was with regards to the Healthcare business is seeing a sequential decline on the Healthcare side, the understanding was that we had won a few deals there and thereby one would see continued growth.

So, from that standpoint, if you could help us understand what gave the sequential drop here, if there were any one time elements of revenues in 4Q if you could call that out?

And the second question was with regards to the underlying shift towards India, if you could talk about your comments there given the labor or the staffing challenges that one has seen in Philippines as well as in the Europe?

Vipul Khanna

So, Manik the second comment quickly first, clearly, both the UK and U.S. markets have talent shortage at the frontline level.

And to that extent, I mentioned about Mexico Center getting opened in March; Philippines, we already had, but we are seeing good demand.

We have won a couple of deals that we are scaling up there.

And I think that recognition of considering for contact center or center processes Mexico, and definitely for chat and back-office for India, we see an uptick of demand in Healthcare, we see that in Mortgage, and we see that in BFS and CMT clients in UK, right.

I can almost see that as a broad trend.

Obviously, the scale is small and unique kind of teases out, right, the scale buildup is small.

But as the year goes by, we do expect that some of our existing business will convert to offshore as well as the new wins, it’s an increasingly important part of the new solution that we are putting together between Philippines, Mexico and India, as far as our Healthcare, Mortgage and CMT business is concerned.

On your first question, Healthcare, it had a couple of very strong quarters of growth, coming into Q3 and Q4 of last year.

This quarter has been sort of flattish, largely because HPHS took a little bit of a breath, as we kind of focused on executing some of the deals and putting our shoulder behind sort of all that it takes to implement between technology and people.

Provider business, it's kind of dealing with some of the reminisce of COVID, not necessarily in terms of consumer behavior, but the government interventions in the reimbursement cycle are kind of going away in an inconsistent manner across different states.

So, there are some minor puts and takes from a timing standpoint or when approval come through from different states, on our Provider business, then it kind of flows through to our clients and hence to us because it's outcome driven. © Firstsource Solutions Limited So, nothing secular or structural out there.

We expect strong growth to pick up from Q2 onwards in Healthcare.

And overall, as we end of the year, we expect strong growth from HPHS and decent growth from the Provider segment.

Manik Taneja

One last question on the Healthcare HPHS business, over there should one expect a typical seasonality wherein 3Q and 4Q should do much better than first half the year given the vagaries of the enrollment for the open enrollment cycles with the American Healthcare System.

Vipul Khanna

So, there is definitely an uptick in Q3, and it bleeds over into Q4 because open enrollment period for a majority of the population is leading up to December, so that they are ready for next year.

It's not significant, but it's definitely an uptick that we see in Q3, Q4, historically across our health plan.

Moderator · Conference Operator

Thank you.

The next question is from the line of Dipesh Mehta from Emkay Global.

Please go ahead.

Dipesh Mehta

Couple of questions, first about the guidance.

In the guidance I think you alluded about weakness to persist in H1 and recovery in H2.

So, can you help us understand let's say next three quarter how the trajectory look like, both from revenue perspective and margin perspective, whether we are making too much for Q3, Q4, and which again, carries some risk in terms of guidance or you believe Q2 onwards we will see sequential growth playing out, and margin also will start recovering?

Second related question is about let's say 2% to 4% constant currency, YoY when we say. what kind of CQGR we are building for next three quarters?

Second question is about the Healthcare business, to some extent you alluded, but if you can provide some sense about Provider business, it seems weakness for Provider business for some time.

Some of your peers seeing healthy recovery over last couple of quarters, maybe mix change or some other differences, but our recovery seems to be very soft compared to some of our peers, so if you can provide some sense?

Vipul Khanna

So, guidance, overall, we expect that growth will pick up through the year.

At an overall level, Q2 will be flattish compared to Q1, and then will kind of pick up.

And that's largely because Mortgages will decline next year.

And it will kind of mute away the growth in other sectors.

So, ex-Mortgage, we expect decent set of growth in other businesses in Q2, and that trend will continue.

When the Mortgage decline starts to arrest after Q2 that will kind of show up more in the growth at the overall level.

So, on your question of what is the compounded quarterly growth rate, at this stage, we expect that will be between something like 3.2% to about 4%, between Q2 to Q4. So, that's from the guidance. © Firstsource Solutions Limited As far as margins is concerned, couple of factors which are playing up on the margin.

One as the margin decline, we have a direct cost base in the Mortgage business, especially that we need to tackle which we are tackling.

There is an impact of restructuring costs that we have in this quarter.

And kind of it will taper off by next quarter.

So, that imbalance of direct costs, which is weighing heavy on Q1, and slightly less than Q2, that will kind of finish off by end of Q2, that's one positive factor to the margin.

Second, the actions we have taken on our indirect costs, whether its leadership support, as well as leadership and support or infrastructure, those actions have been implemented.

Obviously, they have long notice periods and cycles from our facility and technology reduction.

Those, we expect to kick in from Q3 and Q4. And as I mentioned, we expect that will lift our margins from Q3 by about 200 basis points.

So, between the reduction of load in direct cost, the restructuring costs tapering off, and the gains from indirect costs, we do expect that our operating margins should start to come back to around 11.5%, 12% by Q4 to end the year overall, between 10% to 10.5%.

That's kind of the margin ramp that we see from Q1 to Q4. On the Healthcare business, Provider, so I think I had mentioned we had a strong sales quarter in Q4, after about 10 quarter, we had a highest sales in Q4. We continued with pretty much the same trajectory of growth in Q1 as well.

But this business has a longish implementation cycle.

You get prospective placements from your clients, you don't work on whatever their previous vendor or in-house might be working on, you only get fresh placements.

And there is a cycle for those placements, to work their way through the different service value chain, and by the time you recognize revenue, it kind of gets to be about sort of six to nine months in terms of meaningful revenue.

So, those gains will kick off towards the second half of the year.

That's one common.

Second, our business, as we have been saying, is kind of, we are the leaders in eligibility and building in RM business.

That has its own nuances.

It's completely an onshore business.

Since the last couple of quarters, we have stepped back and broaden the scope of where we play.

We have put in a new team.

We are digitizing are offering.

And we are also building up capabilities for mid revenue cycle, so that we can start to kind of cross-sell to our existing clients, on some of the mid revenue cycle opportunity where offshore plays an important part.

So, we also see growth in some of our competitors who have much broader offerings and also they have offshore presence in that.

And that's one of the targets we are doing to increase our business.

Our core business is obviously linked to how the macro conditions and the public health emergency plays.

But given the fact that sales have increased, gives us confidence that as the year goes by, some of those remnants will kind of wash itself out through the RPM cycle of the U.S. industry. © Firstsource Solutions Limited

Dipesh Mehta

Vipul, just on one follow up on margin.

Let's say in Q1 we deliver 8% EBIT margin, you indicated revenue to be flattish in Q2 considering Mortgage business headwind likely to persist in the near term.

So, you think this margin is also likely to remain closer to Q1 or you think now improvement will start from Q2 onwards.

Vipul Khanna

No improvement will start from Q2, Dipesh because some of the costs action we have taken and some of the restructuring will taper off.

So, for instance, this quarter, and Dinesh can validate comment in, this quarter we had about 60 bps of impact from restructuring costs that will taper down to about 35% 40% in Q2, right.

So, some of those direct cost benefit will come in, and we will see a lift in the margin from Q2 itself.

Dinesh Jain

No, that is right.

I think the Q2 onward we will start seeing margin improvement.

A lot of cost actions have been taken and some of the costs have already been taken out.

So, Yes we will see the improvement.

Moderator · Conference Operator

Thank you.

Next question is from the line of Shradha from Asian Market Securities.

Please go ahead.

Shradha

I have a couple of questions from my end.

So, can you quantify the mix of servicing and origination in our Mortgage business this time around?

Vipul Khanna

Yes, so Shradha for the end of this year, we expect we will be between two-thirds servicing and one-third origination.

At this point in time, we are at about 40-60, between origination and servicing.

Shradha

And Vipul, if we really look at what happened in this quarter, we had guided to Mortgage being at $32 million to $33 million run rate in 1Q.

And that is where we actually landed.

So, the interest in this quarter was more to do with other businesses than Mortgage actually, so is the understanding right?

Vipul Khanna

Partly, but look, we were expecting that we will taper off, we will kind of find the new equilibrium from Q2. But towards May and June, we have seen sliding down of revenues.

And hence we are seeing a significant decline that you see in Mortgage quarter-on-quarter between Q1 to Q2, that has an impact on cost and margin significantly, right, because you have your revenue starts to tail off sort of mid-quarter from where we want it.

So, yes, we are broadly slightly lower than where we wanted for Q1, but if the Q2 and the lower base for Q3 and Q4, which is a big driver for our guidance revision.

Shradha

And what kind of decline we are building in for 2Q, if we can give some sense on that?

And do we expect a further decline in 3Q over 2Q or 3Q should be more steady state, vis-à-vis 2Q? © Firstsource Solutions Limited

Vipul Khanna

So, at this stage, we are expecting Q2 on Mortgage to be closer to between, let's call it $25 million to $26 odd million.

It will bottom out from there slightly in Q2, not a whole lot, that's how we see at this point in time, and then gradually pick up a little bit it will pick up from Q4.

Shradha

And just under leadership restructuring, what actually do we mean there, I mean, has there been some voluntary attrition of people that we have seen at the senior leadership level or what exactly do we mean there?

Vipul Khanna

So, I meant two parts, one that the whole support infrastructure, right, that is built up to support a business that had scaled up to a business which was running at about $200 plus million right.

Now, that's the business which will pretty much halved.

So, to that extent, we are realigning the support infrastructure across the functions for that lower base.

And second, as the business for Mortgage has declined, obviously, across the pyramid, we have had to reduce some of the talent cost there.

So, at the senior level, we have stability, but at the operating level at some of the solutioning and stuff level, we have had to kind of recalibrate the business to the new reality of the volumes.

Shradha

And just one last bit on the two acquisitions, how our cross selling synergy is playing out in both Stonehill and ARSI, we can talk more about that.

Vipul Khanna

So, the ARSI acquisition is playing out well, it's integrating well.

We had mentioned that they had lower margin than us.

And it will kind of take us this financial year to kind of bring them to parity by end of the year.

I think that is on par, mostly.

On Stonehill, clearly they have also been impacted by the industry, significant decline in the industry on their revenue.

And given it’s a platform-based business, it has impacted their margins pretty significantly.

And we have had to recalibrate that cost as well in Q1 to this new reality.

The good thing is that because they had lesser exposure to origination, and they are mostly QC and due diligence, which are secondary market activity.

We saw that they stabilized in June, and in July also we have seen strength in their business, or at least there is stability now.

And they obviously will recover a little bit ahead of the core business, given once there is stability in the secondary market transaction.

It shows through in volumes of QC in view of Stonehill.

So, revenue wise they are stabilizing, margin wise they were worse than where we anticipated, primarily because it's the platform business.

And I think it will take us till end of the year to bring them back to a reasonable level of margins. © Firstsource Solutions Limited

Shradha

And just one last thing, the guidance is on constant currency basis, which is of 2% to 4%, and assuming 250 bps cross currency headwind given a 30% exposure to Europe that we have.

So, in dollar terms of we might actually see a decline in revenue this year versus 22, is this understanding right?

Dinesh Jain

I don't think we have done that working.

But Yes, it can be because our rupee is at Rs.

79 or Rs.

80, so year-on-year basis that’s a change, plus I think dollar, GDP also trending lower, it is now at 1.22 and 1.24, so it can, but we have not done the working, I think we will share with you once we have done that.

Shradha

And last time you that indicated that the guidance, yes --

Ankur Maheshwari

What I was saying Shradha is that we have about 30% of the business coming from UK.

So, that obviously will be exposed to this moment.

To that extent, we will have that impact on our dollar revenue.

Shradha

And the last time we had split out the guidance in terms of organic and inorganic, and we had expected almost a 600 bps contribution to come in from acquisitions.

Is that number still the same or has there been a change of mix between inorganic and organic contribution now?

Vipul Khanna

I think so first of all, as I mentioned, excluding the impact of both Mortgage and full year impact of acquisition, we expect growth of 16% to 21% for the fiscal, which means that other businesses are performing strongly.

On the inorganic impact I think we will see some trimming as I mentioned, ARSI is part of the Collection cycle.

So, there will be some trimming, slight trimming there.

And then Stonehill has also been impacted to some extent, I don't have a quantified, we can answer later.

But I think it will be slightly lower than the 6% impact that we expected from the acquisitions.

Moderator · Conference Operator

Thank you.

My next question is from the line of Sachin Kasera from Svan Investments.

Please go ahead.

Sachin Kasera

One thing is that, if you could give us some sense on your vision for more like a two, three year perspective, because of this heavy dependence on Mortgages, we had a very big impact on our numbers.

So, how are we looking to build a company so that we are more diversified, both in terms of geography as well as in verticals, so that we again, do not have the same sort of mistakes.

So, if you could just give your broad vision of post this month that we are seeing or headwind we are seeing, how do we see the company say in FY'25? © Firstsource Solutions Limited

Vipul Khanna

So, let me just quick comment on Mortgage before I get to the overall vision.

So, look Mortgage is a volatile business, it’s a more dynamic business, it’s linked to economic cycles and we know that.

Typically, these cycles are four to five years, right, these cycles work in the form of interest rates decline, refinance, become very viable, etc, etc. But given the unique circumstances of COVID, where interest rates went down to record low, demand picked up significantly, this cycle got compressed.

And you saw some tremendous growth in our business in the last two years.

And at the other side of the cycle, that the economies come out of this and you have seen sort of successively increasing actions, and the pace of the actions which FED is now doing, has not been done in the last 40 years.

So, with those sort of actions, the decline is also very precipitous, right.

So, this cycle, instead of five years, has got compressed to two years on both way, on the way up, as well as the way down.

And which has given less time to the industry, our clients and hence us to prepare for this kind of thing, but fundamentally solid business.

And as we go forward, we think from the start of the cycle to now, we have almost doubled the base of our clients, we have a diversified client base.

We want to expand into other parts of the Mortgage chain, so that we are not totally at the -- so that originations become the smaller part.

There are other pockets and products like Home Equity, Home Improvement, other parts of the value chain, where it can play, and also take this expertise and expand into consumer lending or other parts of BFS, right.

So, take some Mortgage and go to other parts of consumer lending.

So, take this core, and we can expand into multiple ways, that's one of the strategies coming out of this cycle that once we have this foundation of the Mortgage business, where do we take it.

At a broader level, as I mentioned, by end of FY23, Mortgage will be about 13% to 15% of our business, which means that rest of our business is less linked to that economic conditions.

That's why we have been investing in Healthcare growth, like Healthcare, both payer and provider.

We have been investing in CMT.

And we have been investing in different parts of CMT, for instance, Digital Media, edtech etc. And we are also starting to think about, as I already talked about delivery dependency kind of coming on to other places.

So, I think from a vertical standpoint, within the broad verticals of Healthcare, BFS and CMT, we are finding segments where we think we have a legitimate claim to kind of win or right to win, and expanding into that.

Again, reiterating what I have said, if you take ex-Mortgage, if it's a 16% to 19% growth, going into next year, when Mortgage becomes a smaller base, and it has stabilized, I expect that at the reported level we will deliver good top quartile growth for the BPO 30 industry, we will be able to kind of give that consistently once we have this portfolio realigned after this year's aberration. © Firstsource Solutions Limited

Sachin Kasera

Secondly, we have a significantly good exposure to the UK economy, we again have been reading that Europe itself is again seeing some sort of recessionary condition.

And the Pound has also depreciated.

So, what is your take on this?

And can this also give us some negative surprises maybe if things deteriorate further from here, say, Q2 or Q3 and could again lead us to some sort of revision in guidance or outlook or negatively?

Vipul Khanna

Yes, the UK economy is also going through a pretty soft phase.

There is political uncertainty, there is economic conditions, high inflation, high energy prices, which are impacting the economy and the populous there, no different as such from the U.S. economy.

In general, when companies have pressures, outsourcing is a good answer.

It is playing out in UK, it is playing out in U.S., ex-Mortgage.

So, we are seeing good demand.

Q1 was very strong quarter for UK.

And looking at the ramp ups that we have in play as well as the pipeline we feel good about the growth in UK for this year, and going into next year.

The softness in the economy, we are seeing demand in BFS, we are seeing demand in CMT.

And in small ways, when we play in the utility segment, we are seeing demand there as well, in the UK markets.

The impact of Pound softening, that will play in our financials, Dinesh has kind of covered most of it from a Foreign Exchange exposure.

So, for now, I don't expect any downside risks from the UK economy condition playing on our revenue and margins.

Dinesh Jain

No, I think Vipul, that’s true, because I think the consolidation level, you may have revenue impact, but bottom line, not going to be significant, and all offshoring is as you know that we already covered one year at the average rate of 114, while your current GBP is around 95, 96, so it is very much covered.

Sachin Kasera

So, one question on the net debt, it had gone up significantly last two years because of acquisitions.

So, what is the thought process there?

Would we now look to reduce the net debt before we do any major acquisition?

Dinesh Jain

I think this quarter we reduced the debt because all the cash flow has been utilized only for that purpose.

And I think I have said in the past also I think that debt level is like hardly to like 40% or 50% of the working capital which we have.

And we have not taken really the long term debt for acquisition and more at cash flow which utilized.

And I think its better to protect the interest rate, we have converted some of the working capital to a debt, which is two year and three year.

But purely these are money utilized for working capital.

So, I think I will say that these are all debt, which is for working capital and it’s that way, I don't think there is anything else specific to it.

Sachin Kasera

So, the surplus cash that we will generate post the payout, we intend to, again look at some acquisition opportunities, or we will primary reduce debt, that was my question? © Firstsource Solutions Limited

Vipul Khanna

So, we continue to look very systematically for adjacent growth areas, and as part of that, inorganic is always a strategy.

Nothing imminent, nothing planned for now, but we continue to look into markets continuously evaluate opportunities as they come aligned to our growth trajectories.

So, at this point in time, nothing specific to report on that aspect.

Sachin Kasera

And just last question on this margin in Healthcare QoQ I can see some significant compression, I don’t know if you have covered that, but there seems to be a significant compression in the margins in the Healthcare vertical versus the March quarter.

So, I don't know if you have commented on that --

Vipul Khanna

So, couple of reasons for Healthcare margin compression i) The Q4 margin was higher, because there were one off items that that had taken the margin up for Q4. As that effect normalizes, that kind of shows up in Q1. ii) Given some of the wins and the focus and execution, we have had the kind of starting to implement cost comes before revenue, that is another part of normalization, which we will see.

And then iii) As I have mentioned, in the past, digital intake is one of our go-to-market strategies for large health plans.

It's a competitive business, it has a long lead implementation cycle, because it's dependent on technology and stuff.

That business is kind of, at this stage going through its implementation phases, and it's impacting the margins.

Once it scales up, once we have a better equilibrium on execution on that business, that will also contribute positively to the margin, but this quarter, it impacted the margins for HPHS business.

So, these are the three reasons why we saw sequential decline on Healthcare margins.

Sachin Kasera

So, fair to say that Q4 was a little high because of one offs and this quarter, it's low, again, because of one offs.

And hence, the compression looks much more magnified.

Vipul Khanna

Exactly.

Sachin Kasera

Would you be able to quantify this one offs, approximately, how much was the one off in Q4 on the positives and how much of the negatives, this quarter?

Dinesh Jain

I think we need to have exact in a percentage term.

But I think there are three reasons which Vipul said, I will say that 25% reason for the last year, but the 75% reason for the current year, which is mainly the investments and I think due to the new businesses which we have taken where we have a cost of growth cost, which comes into play.

So, I think that was the most bigger reason. © Firstsource Solutions Limited

Moderator · Conference Operator

Thank you.

Next question is from the line of Chirag from Ashika Institutional Equities.

Please go ahead.

Chirag

I have a few questions with respect to the margin levers, which we can use to maintain the performance of what you guided.

Please throw some light, what are the levers we have?

And also ex-Mortgage if our business model is under transition phase from next 3 to 4 year perspective then also will this lever will intact or will it be changed?

And also guidance from three to four years on top line?

Vipul Khanna

Yes.

So, margin levers available to us as I had mentioned, one direct cost for Mortgage business needs to be realigned to the new revenue base, which we have been doing that’s well underway.

Second, our technical infrastructure as well as physical infrastructure obviously, needs to be recalibrated down, that's a longer reduction cycle.

We have initiated those actions.

We will see some benefits in H2, and we will see some more benefits come through in next year as those actions kick in.

And three obviously, when you transition this level of business the growth, the SGA as a percentage of the company, it becomes bigger.

Once this effect wears down, the SGA itself will normalize as a percentage, and that will add the scale effect to the margins.

So, between those three factors is where we see margin coming back to historical level by end of the year.

As we change, as the business becomes more diversified, does it change our margin profile?

No, I think it continues in the same way.

I have said in the past that we think we would like to get to a place where every year we can improve our margins by about 25 odd basis points to operational efficiency, etc. We had delivered that in leading up to FY22. This is a year of abrasion.

And I think they will continue their journey once this kind of wears off from FY24 onwards.

And the same for revenue.

If you look at revenue, FY22 ex-Mortgage we grew 14%, this year ex-Mortgage we are saying we will grow 16% to 19%, not counting impact of acquisitions.

And we do expect to continue in the same way to deliver double digit growth in line with top quartile BPM companies for the next four to five years.

And I think the foundation of business, and if we look at last two year’s trend, we are reasonably confident that we are on track to deliver that.

Chirag

Do we started the wage inflation price into the contracts on client side?

I mean, increasing the project cost and all the other due to inflationary environment?

Vipul Khanna

Yes, we have been at it since last year, some of our contracts have automatic sort of kick in, especially for onshore delivery, as index changes, you know, price changes.

For others we have been negotiating.

There are obviously some lag.

But in general, I'm pleased with sort of how clients have responded to the rising wage inflation. © Firstsource Solutions Limited

Moderator · Conference Operator

Thank you.

Next question is from the line of Sonaal from Bowhead Investment Advisors.

Please go ahead.

Sonaal

I have two questions.

Firstly, on a quarter-on-quarter basis, our depreciation has declined.

What is the reason for the same?

And what would be let's say, a recurring depreciation or the depreciation for the next quarter?

My second query was you mentioned that you have been able to get some price increases and some of these price increases are part of your contract.

So, in outcome-based contracts also, are there such clauses of price increases, like in your Collection business would you get a better pricing based on outcome, considering there has been inflation, or would the pricing be same, because it’s outcome based?

Vipul Khanna

So, look, in general in outcome-based pricing, there isn't an auto inflation and it's hard to get price increases as your cost of input increases for outcomes.

The lever there is operational excellence since we have the flexibility to continue to fine tune our operating model, continue to bring in innovation, that's a value lever to counter rising prices in general.

It's mostly on the input based, FT based where we kind of have either automatic or negotiated price increases.

Dinesh Jain

On the depreciation part, I think some of the facilities which have completed the depreciation period.

So, there is a slightly lower charge this quarter.

And I think as you have seen the CAPEX, which we have invested, probably it will be range bound, I don't think it will increase to that number of Q4 level, but I think it will be range, Rs.

2 crores to Rs.

3 crores here and there.

We did a Rs.

69 crores last quarter, we are at Rs.

64 crores I think it should be in that range of Rs.

65 to Rs.

68 crores, I don't think it will materially change.

Sonaal

Lastly, so I joined late, so maybe you have answered this, but in case of the Healthcare business won't be expecting growth in this quarter, if I remember correctly based on my past discussions and why didn't that materialize?

Vipul Khanna

So, as I said, Healthcare business will grow strongly this year, right.

We have the deals, we are implementing, we know that.

Partly, as I said this has been a quarter of execution on Healthcare on the health plan side, it didn’t show up in revenue primarily because we have won, lot of deals, we are focused on executing; the pipeline is there excellent pipeline which will pick up Q2 onwards on the health plan side.

And on the provider side, we had projected that the growth will come in later part of the year.

The sales have happened; they will start to kind of kick in later part of the year.

Next year in provider, you will see more expression of sort of the COVID impact going away.

So, it's been a little bit of a flattish quarter on Healthcare, but nothing structural and we aren't worried about growth in this sector. © Firstsource Solutions Limited

Sonaal

My question wasn't actually about structural part; I was trying to just understand so this Healthcare are you saying that was in line with your expectations when you had a Q4 call or has there been a change in Q1 compared to your expectations?

Vipul Khanna

Understood your question now.

No, I think broadly in line with our expectations, this isn't something which we not expected.

Moderator · Conference Operator

Thank you.

The next question is from the line of Manik Taneja from JM Financial.

Please go ahead.

Manik Taneja

Just wanted to understand the fact that you spoke about us aspiring to match peers on growth, or the high growth BPO company, should we probably expect given the fact that while Mortgage would have reduced to a much smaller size, but we have the top client which is not such a very high growth account.

So, with almost 30% of your portfolio which has shown probably a subdued growth in that context, can you expect to get back for double digit growth in FY24?

Vipul Khanna

So, Manik I got the thrust of your question, your voice was a little bit in and out.

So, you were saying that with the reduced Mortgage portfolio are we confident of getting double digit growth next year?

Manik Taneja

Yes, that’s correct Vipul.

Vipul Khanna

Yes, so Manik as you just said, if you look at it, like last year, FY22 ex-Mortgage, we grew 14%.

This year, ex-Mortgage and even excluding the Collections and Mortgage acquisition, we are projecting 16% to 19% growth.

The foundation for Healthcare, CMT, and DFS business, including UK, and the Collection business, I think, are good businesses.

They are showing what they have shown in the last two years, Yes.

And I feel good that we will be able to deliver the medium-term growth that we have been talking about the low to mid-teens.

Manik Taneja

And just one last clarification question with regards 2% to 4% YoY CC growth outlook that we have provided for the full year, do you expect the second quarter to be a flat quarter at an overall composite level on a year-on-year basis?

I couldn't understand the comment that you guys made around the 2nd Quarter performance should we expect it to be sequentially flat?

Should we probably expect a YoY flat quarter, if you could clarify?

Vipul Khanna

So, it will be sequentially flat, YoY I think it will show up growth.

It will be sequentially flat because Mortgage will see a decline while other businesses will increase.

So, that's math of it.

Manik Taneja

Sure.

Thank you, I'll take the discussion offline, because I guess asking rate for 3Q and 4Q will be very significant assuming 2Q is flat on a sequential basis but I will take it offline.

Moderator · Conference Operator

Thank you.

Next question is from line Sonaal from Bowhead Investment Advisors.

Please go ahead.

Sonaal

My question was pertaining to credit card recovery business and claims which you get, based on outcome basis.

So, that business didn't do well in the last few quarters, what now, since people are talking about a slowdown, would that be a major part of your growth drive this year, and when do you expect that business to pick up, because there is some lag valuation I understand.

Vipul Khanna

Yes.

So, you are right, that Collection is counter cyclical business right when the economies go soft Collections in general does well.

Because people start to fall behind and stuff and you have more higher Collections than when the economy is good, and everybody's kind of making a lot of money and has a lot of cash.

So, that's the classic economic cycle.

This one because the coming of pandemic and people had a lot of cash surpluses, the buildup of that is something which is taking time, it's not falling predictable patterns.

That's why we will careful instead of forecasting what we originally thought, but in general, we expect the volumes to increase, our clients are telling us to be prepared for volume increases, it's showing up in delinquency.

And as I said, we have also been diversifying beyond credit cards, as new payment methods come in to BNPL, FinTech come into play, we have been targeting them, and we have had some very good wins in the last two or three quarters with those FinTechs because a chunk of the customer spend is now coming through those new payment methods, as opposed to the traditional credit cards.

And we want to make sure that we start young with them.

And as they grow, we grow with those payment companies.

And that will become a reasonably chunky portion of our revenue as we go into this year, and next year.

Sonaal

My other question was a little bit mathematical from your Healthcare business side.

So, let's take your Healthcare business rendered organic assuming no acquisition or assume the base for FY23 and FY22 is same.

Now because of health emergency benefits if the base was 100 just with that going away what could be your revenue, would that be 110, would it 105, would it be 115?

Just to understand the impact of this one off, versus, you know, the various initiatives we have taken that would give us a good perspective of how the business is shaping on the Healthcare side?

Vipul Khanna

Sonaal it's a little bit of a complex answer.

Public Health Emergency is one of the contributors flowing into this mix, right.

I am happy to take it sort of offline on how this plays out.

But in general, if I was to give you an answer, we should see good single digit impact, once this whole remnant of COVID is kind of cleaned from the system.

But there are multiple sort of complexities and when you add the fact that it's a state-by-state answer and political leanings, etc, play into that as well.

So, it's a little bit of a complex equation that we deal with.

Sonaal

And when do you expect this to be off or it’s been already announced that there is an end date for this?

Vipul Khanna

So, what they have been doing is because it's a political decision, they have been kind of pushing it out right earlier, they said it'll be February than April, now, it kind of looks with midterm elections coming there.

They said, it'll be more towards the end of the year.

So, they keep taking a call to say extending it.

But as I said, it's not as black and white, because some of the states have already started to prepare for that, depending on whether which is your political leaning, some of the states have already started to plan and put in place or stopping some of those reimbursements.

So, it's kind of a mixed bag answer, not a big milestone event, which will kind of say this now goes up, it goes down.

Sonaal

In terms of, just to understand your forecasting of your revenues, what your assumptions are what kind of assumption around this method have you assumed in your forecast of ex- Mortgage, is this contributing significantly or not assume anything changing on this front, while giving you know the forecast because forecast is as good as the assumptions, so regarding this particular measure of health emergency, because you said that it will have a single digit benefit.

I am trying to understand when you are guiding for this are you assuming significant benefits from this in FY23?

Or you are not assuming, because we don't know when this measure will go and you said it’s been postponing.

So, have you assumed anything?

Have you assumed something between or you assumed full recovery in the forecast or you know from this health emergency benefits?

Vipul Khanna

We at this stage, we haven't assumed any uplift from the milestone coming through.

We expect it will kind of slowly will kind of unwind its way through the year.

So, we don't expect a big chunk or a big uptick, just because that demand, it'll be the other factors of building our business, where we think we will see growth.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question for today.

I now hand the conference over to Mr. Vipul Khanna for closing comments.

Vipul Khanna

Thank you everyone.

Look, I know this is a year, which is a year of abrasion, it is a difficult period.

But I think the actions we have taken, the investments we have been doing, building our businesses, give us confidence that we will kind of work through this and deliver the growth that we are now talking.

So, thank you for your engagement and I look forward to talking to you again.

Moderator · Conference Operator

Thank you very much.

On behalf of Firstsource Solutions Limited that concludes this conference.

Thank you for joining us, you may now disconnect your lines.

Thank you.

FSL — earnings call

Prepared remarks

Questions and answers