Rating Rationale
August 01, 2017 | Mumbai
Firstsource Solutions Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.470 Crore
Long Term Rating CRISIL A-/Stable (Outlook revised from 'Positive' and rating reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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+'.
The revision in outlook reflects slower than expected improvement in Firstsource's financial risk profile on account of higher debt levels, owing to increased working capital intensity. CRISIL believes that the pace of improvement in Firstsource's key credit metrics will remain moderate going forward, due to continuing high working capital intensity, as well as  expectations that the company will continue to partly rely on debt for pursuing growth.
During fiscal 2017, Firstsource acquired the mortgage business of US based entity ISGN Corporation (ISGN) and also made a contractual payment for securing a 10 year outsourcing deal with Sky UK Limited (Sky). Since both the transactions were debt funded, Firstsource's borrowings have remained at about Rs.940 crores since fiscal 2016. This is in contrast to earlier expectations of progressive reduction in debt, and an improvement in its key credit metrics. Debt to earnings before interest, depreciation, amortization and tax (EBITDA) and net cash accruals to total debt (NCATD) stood at over 2 times and 0.36 times for fiscal 2017, higher than earlier expectations, and unchanged since fiscal 2016. EBITDA improvement was partially constrained by losses at recently acquired ISGN, which is expected to turnaround in fiscal 2018.
Business performance has continued to be adequate, with the company registering revenue growth of 9% between fiscal 2015 and fiscal 2017, while operating profitability has ranged from 11.9% to 12.8% during this period. Business growth in fiscal 2017, was partly supported by acquisition of ISGN, and increase share of business with Sky, which is the company's largest customer, accounting for over fifth of its revenues.

The ratings continue to reflect Firstsource's established market position in the business process outsourcing (BPO) sector, as well as healthy and diversified revenue profile with three major business verticals: healthcare, telecommunication (telecom) and media, and Banking, Financial Services and Insurance (BFSI) and adequate operating profitability. These strengths are partially offset by a modest financial risk profile because of aggressive, debt-funded growth in the past, and exposure to intense competition in the BPO sector.

Analytical Approach

* 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.
* For arriving at the adjusted financials, CRISIL has amortised goodwill on acquired businesses over a period of 10 years.

Key Rating Drivers & Detailed Description
* 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.
* 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

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.

Upside Scenario
* Stronger than anticipated improvement in business performance.
* Faster than expected improvement in key credit metrics, due to better cash generation or reduction in debt levels.

Downside Scenario
* Sharp deterioration in the operating performance of the company, including recent acquisitions, impacting cash generation.
* Debt funded capital expenditure or acquisition leading to further weakening of capital structure and debt protection metrics.

About the Company

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%.
In fiscal 2013, Spen Liq Pvt Ltd, a wholly owned subsidiary of CESC Ltd (part of the RP-Sanjiv Goenka group) acquired 56.82% stake in Firstsource to become the majority shareholder.
Firstsource reported net profit of Rs 279 crore on an operating income of Rs 3,556 crore for fiscal 2017, against a net profit of Rs 265 crore on an operating income of Rs 3,232 crore for fiscal 2016.

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)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs Cr) Rating Assigned with Outlook
NA Cash Credit/Overdraft Facility NA NA NA 25.00 CRISIL A-/Stable
NA Cash Credit/Overdraft Facility* NA NA NA 70.00 CRISIL A-/Stable
NA Cash Credit/Overdraft Facility** NA NA NA 30.00 CRISIL A-/Stable
NA Bank Guarantee NA NA NA 40.00 CRISIL A2+
NA Overdraft Facility# NA NA NA 40.00 CRISIL A2+
NA Packing Credit in Foreign Currency# NA NA NA 171.25 CRISIL A2+
NA Packing Credit in Foreign Currency^ NA NA NA 93.75 CRISIL A2+
*Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit
**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
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
CCR    --    --    --    --  30-05-14  Withdrawal CCR BBB+
Fund-based Bank Facilities  LT/ST  430  CRISIL A-/Stable/ CRISIL A2+    No Rating Change  11-05-16  CRISIL A-/Positive/ CRISIL A2+    No Rating Change  30-05-14  CRISIL A-/Stable/ CRISIL A2+  -- 
Non Fund-based Bank Facilities  LT/ST  40  CRISIL A2+    No Rating Change    No Rating Change    No Rating Change  30-05-14  CRISIL A2+  CRISIL A2 
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
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 40 CRISIL A2+ Bank Guarantee 40 CRISIL A2+
Cash Credit/ Overdraft facility 25 CRISIL A-/Stable Cash Credit/ Overdraft facility 25 CRISIL A-/Positive
Cash Credit/ Overdraft facility* 70 CRISIL A-/Stable Cash Credit/ Overdraft facility* 70 CRISIL A-/Positive
Cash Credit/ Overdraft facility** 30 CRISIL A-/Stable Cash Credit/ Overdraft facility$ 30 CRISIL A-/Positive
Overdraft# 40 CRISIL A2+ Overdraft# 40 CRISIL A2+
Packing Credit in Foreign Currency# 171.25 CRISIL A2+ Packing Credit in Foreign Currency# 171.25 CRISIL A2+
Packing Credit in Foreign Currency^ 93.75 CRISIL A2+ Packing Credit in Foreign Currency^^ 93.75 CRISIL A2+
Total 470 -- Total 470 --
*Interchangeable with Packing Credit in Foreign Currency, Pre Shipment Credit in Forex and Standby Line of Credit
**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
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation

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