| Firstsource Solutions Limited | ||||||
| Rating outlook revised to 'Stable'; ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has revised its rating outlook on the long term bank facilities of Firstsource Solutions Limited (Firstsource) to 'Stable' from 'Positive' while reaffirming the rating at 'CRISIL A-'. The rating on short term bank facilities has been reaffirmed at 'CRISIL A2+'. |
| Analytical Approach |
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* For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Firstsource and its subsidiaries, as all the entities are under a common management and in the same line of business, and have strong financial and operational linkages. |
| Key Rating Drivers & Detailed Description |
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Strengths * Established market position and diversified revenue profile: Firstsource has established itself as a prominent player in the BPO space. The company benefits from its scale of operations and revenue diversity across verticals. Despite the absence of a large captive business or established client relationships through the parentage of an information technology (IT) company, Firstsource has created a strong market position through organic growth, supplemented by acquisitions. * Its revenue profile is well-diversified among the three verticals; healthcare being the largest vertical followed by telecom and media and BFSI contributing 35.80%, 32.20% and 31.80% respectively. In addition, the company also has geographical diversity with revenues from the North America (55%) and UK (38%) in fiscal 2017. Customer concentration is moderately high, with Sky expected to contribute for almost a third of its revenues; albeit Firstsource is one of the exclusive vendors for services rendered to Sky. * Adequate operating profitability: The company's operating profitability has consistently improved over the last five years; its operating profitability stood at ~12.5% in fiscal 2017 compared to ~10.3 per cent in fiscal 2013. This is on account of focus on profitable growth through reduction in business from low margin clients (both domestic and overseas) as well as headcount reduction, and notwithstanding volatile foreign exchange movements. Additionally, over the last few years, Firstsource has taken initiatives for rationalising its costs through alignment of its delivery centres which contributed towards improvement in the operating profit margin. CRISIL believes Firstsource will be able to sustain its current operating margin over the medium term. Weakness * Modest financial risk profile: The financial risk profile is marked by leveraged capital structure but adequate debt protection metrics. The leveraged capital structure is in view of debt funded acquisitions and increased working capital intensity. Cash accruals have registered a growth of only 5% between fiscal 2015 and fiscal 2017, slower than revenue growth of 9%, due to continuing high interest outgo. * Firstsource has relied heavily on acquisitions to expand its service offerings, enter into new verticals, and gain new clients. While the growth strategy enabled it to scale up operations by integrating the acquired businesses, the aggressive use of debt has led to a leveraged capital structure. Gearing stood at 1.96 times as on March 31, 2017 as compared to 1.61 times as on March 31, 2016. Credit metrics though remain adequate with interest coverage and net cash accruals to total debt (NCATD) ratios at 8.35 times and 0.36 times respectively for fiscal 2017. Going forward, credit metrics are expected to gradually improve over the medium term, with progressive debt repayment, despite higher working capital needs for recently acquired businesses. Further, CRISIL also believes Firstsource will benefit from its affiliation with the RP-Sanjiv Goenka group, and will receive need-based financial support. Also, liquidity remains adequate with moderately utilised working capital bank lines, and cash surpluses of almost Rs.200 crore. * 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. Firstsource 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 information technology (IT) companies such as Accenture Plc, Infosys Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+') and Wipro Ltd. Further, the increasing wage cost as well as costs associated with hiring and training fresh talent remains a big challenge. CRISIL believes that Firstsource will continue to face increasing competition in the market place as well as for talent. |
| Outlook: Stable |
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CRISIL believes that Firstsource will witness growth of 7-9%in revenues and sustain its operating profitability over the medium term. Despite progressive long term debt payment, credit metrics, will however, only gradually improve due to higher working capital intensity. |
| About the Company |
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Firstsource provides BPO services across three verticals: telecom and media, healthcare, and BFSI. The company has a global delivery model, with 25,871 employees and 48 delivery centres across the US, the Philippines, India, the UK, and Sri Lanka. The company was promoted by ICICI Bank Ltd in 2001. The bank's stake has reduced over the years and as on June 30, 2017 holds 4.70%. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Bill Discounting #Interchangeable with Pre Shipment Credit in Forex ^Fully interchangeable with Post Shipment Credit in Foreign Currency and Standby Line of Credit |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Bill Discounting #Interchangeable with Pre Shipment Credit in Forex ^Fully interchangeable with Post Shipment Credit in Foreign Currency and Standby Line of Credit $ Interchangable with Pre-Shipment Credit in Forex, Packing Credit in Foreign Currency and Bill Discounting ^^Fully interchangeable with Post Shipment Credit in Foreign Currency and Standby Letter of Credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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