Rating Rationale
September 04, 2019 | Mumbai
Firstsource Solutions Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.470 Crore
Long Term Rating CRISIL A/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (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 Ltd (Firstsource) to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A'. CRISIL has also reaffirmed the rating on the short term facilities at CRISIL A1.
The revision in outlook reflects the expected improvement in business risk profile driven by sustained revenue growth and profitability, despite currency challenges observed in key markets such as Britian)
Despite the divestment of domestic business to (accounted for ~5% in FY18), the company's revenues grew at 8.2% in fiscal 2019. Operating margins improved by 1.2% to 14.4% due to divestment of low-margin domestic business and improved share of value-added services.
Increasing proportion of digital businesses and outcome based assignments will enable the company to post sustained growth in revenues and profitability over the medium term. The onshore delivery model wherein majority of manpower is recruited and deployed in client locations safeguards it from protectionist measures of countries like the US and from currency fluctuations.
The revision in outlook also factors in reducing debt levels and increasing cash surplus, which stood at Rs 171 crores as of March, 2019. The company became long term debt free and hence debligations will remain nil in the near to medium term. Stronger balance sheet and steady cash accruals will increase liquid surplus further and enable the company to pursue moderate capex, without majorly impacting the financial risk profile and liquidity.
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), healthy operating profitability and favorable financial risk profile.
These strengths are partially offset by high geographical and customer concentration in revenue, 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 amortized goodwill on acquired businesses over a period of 10 years.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
* Established market position and revenue diversity: 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. Firstsource has created a strong market position through organic growth, supplemented by acquisitions. Its revenue profile is well-diversified among the three verticals; BFSI being the largest vertical followed by healthcare and Telecom & Media contributing 36.0%, 34.3% and 28.0% respectively. Firstsource is one of the few players in the BPM industry which has a sound operating efficiency with a heavier onshore profile.
* Healthy operating profitability: The company's operating profitability has consistently improved over the last five years; its operating profitability stood at ~14.0% in fiscal 2019 compared to ~13.2 per cent in fiscal 2018. This is on account of focus on profitable growth through reduction in business from low margin clients (both domestic and overseas), increasing use of digital technologies, growth in collection services and improving performance of acquired businesses. Additionally, over the last few years, Firstsource has taken initiatives for rationalizing 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 at 14-15% over the medium term.
* Healthy financial risk profile: Debt repayment and absence of large, debt-funded capex has helped Firstsource improve its capital structure, indicated by gearing of below 1.0 time as on March 31, 2019. Debt protection metrics are also strong, with healthy net cash accrual to total debt ratio of 0.63 time and interest coverage ratio of 11.97 times during fiscal 2019. Liquidity is likely to remain healthy over the medium term because of net cash accrual of above Rs 300 crores and prudent capex funding.
* High geographical and customer concentration in revenue: Firstsource derived 55% of its revenue from the US and Canada in fiscal 2019, and the rest from India and the UK. The geographical concentration in revenue, especially from the US, exposes Firstsource to risks relating to economic slowdown in the region and to volatility in the value of the Indian rupee against the US dollar. Also, customer concentration risks persist. However, during fiscal 2019, the top client contributed about 24% to revenue while the top five contributed 42% which has improved from 28% and 46% respectively in fiscal 2018. CRISIL believes Firstsource's revenue will remain concentrated in the US and Canada over the medium term, driven by its focus on healthcare and telecom segments.
* 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.

Liquidity: Adequate
The cash and equivalents were about Rs 189 cr as on June 30, 2019. Also expected cash generation in FY20 and FY21 is expected to be about Rs 300 to Rs 350 cr. These are expected to be sufficient for incremental working capital requirements, capital expenditures of about Rs 80-100 cr and expected dividend payouts of about Rs 170 cr. There are negligible scheduled long term debt repayments in FY20.
Outlook: Positive

CRISIL believes that Firstsource will witness growth of about 7-9% in revenues and sustain its operating profitability over the medium term supported by increasing share of collections business and outcome based services.
Rating sensitivity factors
Upward factors:
* Sustained improvement in operating profitability to 15-16% and revenue growth of more than 9-10%.
* Steady increase in liquidity driven sustained growth in cash flows from operations
Downward factors:
* Operating profitability declining below 12% or de-growth in revenue
* Increase in debt levels due to high debt funded capex or acquisition or significant stretch in working capital 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 18,712 employees and 37 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, 2019 holds 4.85%.

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. Post the business restructuring in the Sanjiv Goenka group in FY18, CESC ventures Limited owns 53.96% in the company and rest is publicly held.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs Crore 3826 3535
Profit after tax(PAT) ^ Rs Crore 378 40
PAT Margins^ % 9.9 1.1
Adjusted Debt/Adjusted Net Worth Times 0.93 1.44
Interest Coverage Times 11.97 9.32
^PAT adjusted for goodwill amortization till FY2018
Year to date financials
Particulars Unit Q1-20 Q1-19
Revenue Rs Crore 980 919
Profit after tax(PAT) Rs Crore 91 89
PAT Margins % 9.3 9.6
Interest Coverage Times 12.25 20.78

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/Positive
NA Cash Credit/Overdraft Facility* NA NA NA 70.00 CRISIL A/Positive
NA Cash Credit/Overdraft Facility** NA NA NA 30.00 CRISIL A/Positive
NA Bank Guarantee NA NA NA 40.00 CRISIL A1
NA Overdraft# NA NA NA 40.00 CRISIL A1
NA Packing Credit in Foreign Currency# NA NA NA 171.25 CRISIL A1
NA Packing Credit in Foreign Currency^ NA NA NA 93.75 CRISIL A1
*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 - List of entities consolidated
  Entities Consolidated
1 Firstsource Group USA, Inc.
2 Firstsource Solutions UK Limited
3 Firstsource Solutions S.A.
4 Firstsource Advantage LLC
5 Firstsource Business Process Services, LLC
6 Firstsource Transaction Services LLC
7 Firstsource Process Management Services Limited
8 Firstsource BPO Ireland Limited
9 Firstsource Dialog Solutions (Private) Limited
10 One Advantage LLC
11 MedAssist Holdings LLC
12 Firstsource Solutions USA, LLC
13 Sourcepoint, Inc.
14 Sourcepoint Fulfillment Services, Inc.
15 ISGN Fulfillment Agency, LLC (upto 24 June 2019)
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  430.00  CRISIL A/Positive/ CRISIL A1      26-07-18  CRISIL A/Stable/ CRISIL A1  01-08-17  CRISIL A-/Stable/ CRISIL A2+  11-05-16  CRISIL A-/Positive/ CRISIL A2+  CRISIL A-/Stable/ CRISIL A2+ 
Non Fund-based Bank Facilities  LT/ST  40.00  CRISIL A1      26-07-18  CRISIL A1  01-08-17  CRISIL A2+  11-05-16  CRISIL A2+  CRISIL A2+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 40 CRISIL A1 Bank Guarantee 40 CRISIL A1
Cash Credit/ Overdraft facility 25 CRISIL A/Positive Cash Credit/ Overdraft facility 25 CRISIL A/Stable
Cash Credit/ Overdraft facility* 70 CRISIL A/Positive Cash Credit/ Overdraft facility* 70 CRISIL A/Stable
Cash Credit/ Overdraft facility** 30 CRISIL A/Positive Cash Credit/ Overdraft facility** 30 CRISIL A/Stable
Overdraft# 40 CRISIL A1 Overdraft# 40 CRISIL A1
Packing Credit in Foreign Currency# 171.25  CRISIL A1 Packing Credit in Foreign Currency# 171.25  CRISIL A1
Packing Credit in Foreign Currency^ 93.75  CRISIL A1 Packing Credit in Foreign Currency^ 93.75  CRISIL A1
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
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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