Rating Rationale
June 28, 2023 | Mumbai
Firstsource Solutions Limited
Ratings reaffirmed at 'CRISIL A+ / Stable / CRISIL A1 '
 
Rating Action
Total Bank Loan Facilities RatedRs.470 Crore
Long Term RatingCRISIL A+/Stable (Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its  ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Firstsource Solutions Limited (FSL).

 

The ratings continue to reflect the established market position of the company in the business process outsourcing (BPO) sector, as well as a healthy and diversified revenue profile with three major business verticals: banking and financial services (BFS), healthcare, and communication media and technology (CMT).

 

Operating performance was comfortable in fiscal 2023 despite macroeconomic headwinds faced especially in the mortgage business, with the US mortgage market (accounts for 66% of the overall revenue of FSL) at its 10-year low on account of the all-time high interest rates. While this led to a de-growth of 12% in the BFS segment, overall revenue grew 2% year-on-year on the back of healthy growth in services in the healthcare and CMT segments. The EBITDA (earnings before interest, taxes, depreciation, and amortisation) also moderated to 14% in fiscal 2023 from 16% previous fiscal but is likely to improve hereon as the BFS segment revives operations.

 

While outstanding debt has increased over the past fiscals to fund acquisitions of American Recovery Services, Inc (ARSI) and The Stonehill group, financial risk profile is comfortable because of a healthy profitability and cash balance of Rs 215 crore as on March 31, 2023.

 

The company may pursue small to medium-sized acquisitions over the medium term that may not be highly debt-funded. This, along with healthy cash accrual, will continue to keep debt protection metrics comfortable over the medium term.

 

These strengths are partially offset by high geographical and customer concentration in revenue and exposure to intense competition in the BPO sector.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of FSL and its subsidiaries as all these entities are under a common management and in the same business and have strong financial and operational linkages. Goodwill of Rs 439.3 crore on acquisition of the Stonehill group and ARSI will be amortised over 5 years.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths: 

  • Established market position and revenue diversity: The company is a prominent player in the BPO space and benefits from its scale of operations and revenue diversity across verticals. Its market position is strengthened through organic growth supplemented by acquisitions. FSL is largely present in the US and UK markets, which have accounted for 66% and 33%, respectively, of overall revenue in the last three fiscals. Revenue profile is well-diversified across BFS (largest vertical), healthcare and CMT, which contributed 43%, 34% and 21%, respectively, to the turnover in fiscal 2023.

      Comfortable operating performance: Operating performance was robust in fiscal 2023 despite macroeconomic headwinds faced in the mortgage business, with the US mortgage market at its 10-year low on account of the all-time high interest rates. While this led to a de-growth of 12% in the BFS segment, overall revenue grew 2% year-on-year on the back of healthy growth in services in the healthcare and CMT segments. This is against an 11% CAGR (compound annual growth rate) in revenue over the five fiscals through 2023. Though EBITDA margin also moderated to 14% in fiscal 2023 from 16% previous fiscal, it is likely to improve hereon as the BFS segment revives operations.

  • Adequate financial risk profile: Networth was large at Rs 3,191 crore as on March 31, 2023, while liquidity was strong with free cash and bank balance of Rs 215 crore; total outside liabilities to tangible networth ratio was healthy at 0.4 time. Interest coverage ratio was healthy at 10.4 times in fiscal 2023. The company may pursue small to medium-sized, modestly debt-funded acquisitions over the medium term. Any change in these expectations that could materially alter financial risk profile would be a key rating monitorable.

Weaknesses:

  • High geographical and customer concentration in revenue: About 66% of revenue came from the US in fiscal 2023 and the rest from India and the UK. This exposes FSL to risks relating to economic slowdown in the US and to volatility in the value of the rupee against the dollar; customer concentration risk also persists. However, the top client contributed about 15% to revenue while the top five contributed 37% in fiscal 2023, against 16% and 39%, respectively, in fiscal 2022. Revenue will remain concentrated in the US over the medium term, driven by the BFS and healthcare segments that operate from there.
     
  • Susceptibility to intense competition in the BPO sector: With the rapid evolution of the Indian IT-enabled services (ITeS) sector, competition is intense as companies compete for a share of the outsourcing pie. FSL faces tough competition from other pure-play ITeS players such as Genpact, WNS (Holdings) Ltd, Convergys Corporation and Hinduja Global Solutions Ltd (CRISIL A+/Stable/CRISIL A1+), besides BPO operations of large IT companies such as Accenture Plc, Infosys Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’) and Wipro Ltd. Furthermore, increasing wage cost as well as costs associated with hiring and training fresh talent remain big challenges.

Liquidity: Strong

Liquidity is driven by expected cash accrual of Rs 500-700 crore per annum in fiscals 2022 and 2023 and cash and equivalent of Rs 215 crore as on March 31, 2023. The company has sufficient accrual and unutilised bank limit to finance its capital expenditure (capex), debt repayment (Rs 80-100 crore in fiscal 2023) and incremental working capital needs.

Outlook: Stable

Strong order book and established position in different business verticals, as well as recent acquisitions are expected to drive healthy revenue growth over the medium term. High operating capabilities will ensure strong annual cash generation. Financial risk profile will remain adequate, supported by healthy accrual.

Rating Sensitivity factors

Upward factors:

  • Increased customer diversity and sustenance of healthy deal pipeline leading to better-than-expected revenue growth and profitability (over 17%), thereby resulting in high annual cash generation
  • Sustenance of adequate financial risk profile and debt metrics
  • Shoring up of liquid surpluses supported by better operational cash flows

Downward factors:

  • Sharp decline in revenue growth by more than 15% and fall in operating margin below 10-11% impacting annual cash generation
  • Rise in debt due to sizeable capex or acquisitions, or higher-than-expected dividend payout or support offered to group companies impacting debt metrics and build-up of cash surpluses

About the Company

FSL, incorporated in 2001, provides BPO services across three verticals: telecom and media, healthcare, and BFS. The company has a global delivery model, with 23,018 employees and 43 delivery centres across the US, the Philippines, India, the UK, and Sri Lanka as of fiscal 2023. FSL was promoted by ICICI Bank Ltd in 2001 and is currently a wholly owned subsidiary of RP-Sanjiv Goenka Group (erstwhile, CESC Ventures Ltd) with 54% shareholding as on March 31, 2022.

Key Financial Indicators

Particulars*

Unit

2023**

2022

Revenue

Rs Crore

6,022

5,921

Profit after tax (PAT)

Rs Crore

426

449

PAT margin

%

7%

8%

Debt/tangible networth

Times

0.4

0.6

Interest coverage

Times

10.5

11.3

*CRISIL Ratings-adjusted numbers

**Fiscal 2023 numbers are provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Bank Guarantee NA NA NA 40 NA CRISIL A1
NA Cash Credit/ Overdraft facility NA NA NA 25 NA CRISIL A+/Stable
NA Cash Credit/ Overdraft facility* NA NA NA 10 NA CRISIL A+/Stable
NA Overdraft facility# NA NA NA 40 NA CRISIL A1
NA Packing Credit in Foreign Currency# NA NA NA 90 NA CRISIL A1
NA Packing Credit in Foreign Currency# NA NA NA 85 NA CRISIL A1
NA Packing Credit in Foreign Currency# NA NA NA 90 NA CRISIL A1
NA Packing Credit in Foreign Currency# NA NA NA 90 NA CRISIL A1

*Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit

#Interchangeable with Pre Shipment Credit in Forex

Annexure – List of entities consolidated

Names of Entities Consolidated Extent of Consolidation  Rationale for Consolidation 
Firstsource Group USA, Inc. Full Common management and promoters, same business, and business and financial linkages
Firstsource Solutions UK Ltd Full
Firstsource Solutions S.A., Argentina Full
Firstsource Advantage LLC, USA Full
Firstsource Business Process Services, LLC Full
Firstsource Health Plans and Healthcare Services LLC Full
Firstsource Process Management Services Ltd Full
Firstsource BPO Ireland Ltd Full
Firstsource Dialog Solutions (Pvt) Ltd Full
One Advantage LLC Full
MedAssist Holdings LLC Full
Firstsource Solutions USA, LLC Full
Sourcepoint, Inc. Full
Sourcepoint Fulfillment Services, Inc. Full
Patient Matters, LLC Full
Kramer Technologies, LLC Full
Medical Advocacy Services for Healthcare, Inc Full
Firstsource Employee Benefit Trust Full
The Stonehill Group, Inc Full
American Recovery Services, Inc Full
Firstsource Solutions Mexico, S. de R.L. de C.V Full
Nanobi Data and Analytics Pvt Ltd Full
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 430.0 CRISIL A+/Stable / CRISIL A1   -- 30-03-22 CRISIL A+/Stable / CRISIL A1   -- 31-12-20 CRISIL A+/Stable / CRISIL A1 CRISIL A/Positive / CRISIL A1
Non-Fund Based Facilities ST 40.0 CRISIL A1   -- 30-03-22 CRISIL A1   -- 31-12-20 CRISIL A1 CRISIL A1
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Bank Guarantee 40 CRISIL A1
Cash Credit/ Overdraft facility 25 CRISIL A+/Stable
Cash Credit/ Overdraft facility& 10 CRISIL A+/Stable
Overdraft Facility^ 40 CRISIL A1
Packing Credit in Foreign Currency^ 90 CRISIL A1
Packing Credit in Foreign Currency^ 90 CRISIL A1
Packing Credit in Foreign Currency^ 85 CRISIL A1
Packing Credit in Foreign Currency^ 90 CRISIL A1
& - Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit
^ - Interchangeable with Pre Shipment Credit in Forex
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation

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