Ladies and gentlemen, Good day and welcome to Firstsource Solutions Limited Q1 FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Maheshwari from Firstsource Solutions. Thank you, and over to you, sir.
Thank you, Neil. Welcome everyone, and thank you for joining us for the quarter ended June 30, 2022 earnings call for Firstsource. Do note that the results, fact sheet and the presentations have been emailed to you, and you can also view this on our website www.firstsource.com. Before we begin the call, please know that some of the matters we will discuss on this call, including our business outlook, are forward-looking and as such are subject to known and unknown risks. These uncertainties and risks are included but not limited to what we have mentioned in our prospectus filed with SEBI and subsequent annual reports that are available on our website. That said, I now turn the call over to Vipul Khanna to begin the proceedings.
Good evening, Everyone and thank you for joining us today. Hope the summer and our monsoon are treating you all well. Here's a quick snapshot of the quarter. Our revenues 2.7% year-on-year in constant currency and came in at INR 14,724 million, $491 million, Operating margins were 8% and EPS Decreased by 36.6% year-on-year. The macro environment remains dynamic and the past six or seven months have been unprecedented, making it challenging for us to forecast certain portions of our business accurately. Successive significant interest rate increases , multi-decadal high inflation rates and increased fears of recession are impacting parts of our BSS business. The headwinds, primarily to our U.S. BSS business, are worse than we originally anticipated.
As such, we have reassessed our growth visibility and lowered our FY 2023 guidance to 2%-4% growth in constant currency. Excluding mortgages and the full year impact of acquisitions of last year, we expect to grow between 16%-19% in constant currency. The key factors in the guidance revision are as follow one outlook for the mortgage industry has considerably worsened since we last spoke. This will translate to a steeper Q2 and Q3 decline in mortgage volumes than we previously anticipated. We believe that this business will bottom out in Q3 and that we have factored in the downside risk with these lower numbers. In the collections business, the macro indicators continue to point to a gradual increase in delinquency rates as such, we continue to expect growth to pick up in the second half of this fiscal.
However, the inventory is building up slower than we anticipated, hence we are trimming our growth expectations. The mortgage business is expected to impact growth guidance by 3.5%-4% and collections by about 1%. Notwithstanding these challenges, we are confident that our long-term strategies to diversify our business and grow continue to yield results. The demand environment across other segments is strong and is reflected in the strength in rest of our businesses. Given the significant revenue volatility, we expected our margins to decline in H1 and then pick up in H2. The sharper fall in revenue and higher restructuring costs have accentuated the impact on margins for this quarter and the next one.
We are super focused on rationalizing our direct and indirect costs, which we anticipate will result in a positive impact to the operating margin by about 200 basis points from Q3. Overall, we are confident of hitting an operating margin of 11.5%-12% by quarter four. Taking into account all these factors, we expect to achieve operating margins of 10%-10.5% for the year. This includes an 80-90 basis points positive impact from the recent amendments in the accounting standard Ind AS 37 on accounting of onerous contracts. Dinesh will share more details for this in a few minutes. Let me now talk in detail about our segment performance. In Q1 FY 2023, our banking and financial services segment Declined by 11.9% year-on-year and 13.3% in constant currency.
Our mortgage business contributed about $32 million of revenue in Q1. This implies a contraction of 28% QOQ and 48% year-on-year. Since we last spoke, the market activity has decelerated sharply. Weaknesses in refinances and purchases pushed the Market Composite Index, a measure of mortgage loan application volume, down to the lowest levels since 2000. In fact, the Refinance Index was down 80% compared to a year ago. The recent outlook published by the Mortgage Bankers Association reflects a further reduction of 10% and 11% for calendar 2022 and calendar 2023 respectively from their Q1 forecast for the same period. From discussions with our clients, a key variable that has changed between the March and June quarters is the consumer outlook on home purchases.
Despite pent-up demand, high inflation and economic uncertainty have dampened home purchases at least temporarily. A majority of our clients have continuously right-sized their businesses in the last two quarters to align with the rapidly changing market conditions, resulting in lower volume growth to us. We were expecting the mortgage business to bottom out in second quarter of this fiscal and then stabilize thereafter. Now, considering the current volume forecast, our expectations have shifted out by one quarter, with further declines in second quarter and business likely bottoming out in Q3. In H1 of this fiscal, our margins will be impacted by the lag and the lag alignment of direct costs, people restructuring costs, and the higher fixed costs. Aligning our operating costs with lower volume trajectory has been a top priority for us.
And we continue to reduce the direct costs. The restructuring costs will taper down by Q2, and we are realigning our support functions and leadership, as well as rationalizing our tech, and facilities infrastructure. We anticipate to start realizing the savings from the infra and support cost rationalization from Q3. Amidst the painful recalibration of the mortgage industry into this economic cycle, we see a number of silver linings of our business. Clients need more structural and deep impact cost solutions, and our pipeline for such long-range conversation continues to build up. Offshore, nearshore, and digital are few key value levers in this pipeline. In this quarter, we added four new clients for origination and servicing across our traditional target segment, A s couple of exciting wins with property tech, proptech companies.
In our collections business, the macro data continues to show consistent improvement. According to the most recent data from the Fed, delinquencies increased to 1.70% from 1.60% in the previous quarter. This is the third straight quarterly increase, although the metrics is still lower than pre-pandemic levels. On the other hand, we also know that high inflation and higher interest rates in general have a negative impact on repayment ability and credit demand. Coming out of the unique economic and social conditions of the pandemic, card issuers are fine-tuning their strategies between first- and third-party collection and between traditional and digital. Our collections business is tightly linked to the outcomes we deliver to our clients. In this period of exceptional volatility, it has been difficult to establish a strong trend for both our clients and for us.
We continue to expect strong volume growth in H2 of this fiscal year, but it's likely to be lower than our earlier estimates. With this practice, we continue to make solid progress in diversifying this business. We recently secured a win with one of our key BFS clients in the UK, and I'm encouraged by the collection services demand in that geo. We are steadfast in building a presence in FinTech and utilities. We added three new clients during this quarter and the sales momentum is expected to remain strong through the year. We continue to invest in building our digital collections platform, incorporating ML recommendation strategy, newer training methods, and increased API usage. We are also seeing strong demand for our recently opened Mexico nearshore location. The UK BFS segment is growing strongly.
I have shared that reintegrating the GPM focus for this UK business is a priority for me in this fiscal year, and I'm pleased to report that it is working. We had a strong quarter of new openings and growth with our UK BFS clients. We also opened a collection service line with a key client, providing great validation of our market efforts in the last year. The ramps for these are underway and should deliver steady state revenues by Q3. We recently closed an exciting digital transformation deal with a leading FinTech in the UK. The demand environment, pipeline activity, and digital adoption remains strong despite the political uncertainty and tough economic conditions. The talent market continues to be challenging. We are focused on execution, expanding our delivery network and smaller nodal centers within UK, and at the same time easing out the shift towards offshore.
We reaffirmed our top ranking within the UK CX segment by winning 5 different industry awards. Our healthcare segment continues to grow consistently at 18% Y-o-Y and 13.3 in constant currency terms. In the last 4 quarters, HCS segment had a number of significant wins. We are now sharply focused on executing and scaling on these recent wins. For our HCS business, the growth thesis continues to be hinged on expanding into the top end health plans, growing our digital intake business, and creating bespoke DPAS solutions for mid-market health plans. Our targeted market making efforts continue to yield strong opportunities. The pipeline, especially for large deals from top tier health plans, is healthy. We also added 2 new clients this quarter.
In addition to the Everest Group and ISG recognizing us as a leader, Addison has recognized us as a disruptor in the healthcare payer operations market, citing our digital-first approach, innovative solutions, and strong execution. I'm also pleased at the demand pipeline for Mexico and Philippines as healthcare clients increasingly consider supplements to U.S. delivery, especially for the Medicaid business. The provider segment is gradually emerging from COVID and its residual impact. As anticipated, the public health emergency has been further extended until end of this calendar. The talent supply challenges for this industry are acute and hospital margins continue to be under pressure. As a result, clients have decided on strategic dollar scope solutions. For the provider business, our strategy is, one, to focus on our competency of eligibility services and receivable management to continue to gain market share.
Two, expand wallet share with our large portfolio of clients by developing adjacent capabilities, including offshore for mid-learning cycle services. We continue to invest in both the market capability and digitizing our offerings to increase engagement with patients and their caregivers. The HCS revenue for the quarter was flattish. The strong sales momentum of Q4 2022 continued in this quarter, including the addition of three new clients. This segment has long implementation cycles, and we expect revenue yield to increase in H2 from the new sales of the last two quarters. Finally, our comms, media and tech segment grew by 0.9% YOY and 5.9% in constant currency terms. Our UK portfolio continues to perform strongly. We continue to scale with existing clients, including adding new lines of business with our largest clients.
During this quarter, we rolled out a large process automation program with a leading comms client. We are excited by the impact it creates on the client's operation and by the opportunity to leverage the showcase engagement. Our North America CMT portfolio is also scaling up nicely, and in this quarter, we added one new account in the tech segment. We've shared that FY 2023 will be a year of transition of our revenue composition. These are clearly unusual and volatile times, and it's challenging to forecast. Having said that, I'm disappointed to speak with you once again about lowering our guidance. This is on me, and I'm fully aware that we need to provide better clarity on the growth outlook of our businesses. If you step back, I'm very confident that our underlying business is strong. The strategic focus we established a couple of years ago remains on track.
We'll continue to invest in our three core industries of banking and financial services, healthcare and CMT, consolidating the leadership position we have in the chosen sub-segments, and systematically adding growth adjacent segments. We'll push forward on digital solution services to take disruptive offerings to market in each of the industries, and above all, build a purpose-led, scalable and agile organization. We continue to diversify our business profile and form a strong base for sustained high quality growth. By the end of fiscal 2023, mortgages will be between 13%-15% of our business, down from about 28% in FY 2022. Ex mortgage, we expect solid growth in Q2 and expect the trend to continue, delivering 16%-19% growth for this fiscal.
On operating margin, we are confident of returning to our run rate of 11.5%-12% by Q4, while maintaining our investments in the growth areas of Europe, healthcare and CMT. In addition to the significant cost actions on the mortgage cost base and the client improvements on last year's margin improvements on last year's activation, we have taken the opportunity to fine-tune our operating model in certain areas and recalibrate the timing of some of our investments. I'll now pass the call over to Dinesh to cover the financial details.
Thanks, Vipul. Hi, everyone. Let me take you through some of the financial highlights. Revenue for the Q1 came in at INR 14,724 million or $191 million. This implies a degrowth of 0.8% in rupee terms and 2.7% degrowth in constant currency. On the margin front, operating margin came in at INR 1,171 million or 8% of the revenue for the quarter, which is 35% degrowth on a year-on-year basis and implies margin decline of 417 basis points. Profit after tax came in at INR 851 million or 5.8% of the revenue for the Q1 FY 2023. This is 36.7% year-on-year degrowth with a margin decline of 328 basis points.
In Q1 FY 2023, we generated INR 1,408 million of cash from operations. Our free cash flow was INR 1,238 million after adjusting for CapEx of INR 170 million. Closing cash balance as of June 30, 2022 was approximately INR 1,935 million. DSO came in at 59 days versus the 57 days last quarter. Net debt as of June 30, 2022 stand at INR 7,333 million or $92.9 million versus INR 8,013 million or $105.7 million as of March 31, 2022. Repayment of around $12.8 million dollar debt during the quarter has been done. Tax rate for the Q1 was around 18.8%.
For FY 2023, we are expected to be within the range of 18%-20% for the year. On the Forex hedging, we have coverage of GBP 25.9 million for the next twelve months with average rate of 114.4 per pound. On the other side, the dollar coverage is for $52.5 million with average rate of 79.1. Let me slightly brief you on the change in the Ind AS 37, which was effective from April 1, 2022. This was the Ind AS 37, which has been amended. Consequent to this amendment to costs that directly relate to a contract consists of now both the costs. First was the incremental cost of fulfilling that contract.
The second is the allocation of all other costs that relate directly to the fulfilling contract. Up to the previous standard, only the direct cost was considered for the arriving at onerous contract. Now onwards, the indirect or allocation of cost also has been considered. This is the change which have come into now. Therefore, in evaluating whether or not a contract has became onerous, both direct and indirect costs of fulfilling a contract have to be considered. As per the transitional provision of Ind AS 37, the effect of the commencement of the reporting period is to be reported an adjustment to the opening balance of retained earnings.
The adoption of this amendment has resulted in a reduction of INR 73.4 million net of deferred taxes in the opening retained earnings, with a corresponding provision for onerous contract as prescribed in the Rule 22. Accordingly, we'll estimate this will result in a lower charge in the profit and loss by 55%-60% of this value in FY 2023 and balance will go to FY 2024 and some portion may be in the FY 2025. The liability for this onerous contract is mainly on account of unabsorbed indirect allocated costs, comprising facilities costs, depreciation on fixed and intangible assets, technology costs, utilities, and some specific geography support service costs. This is the change which have been done in this quarter, and that's the accounting treatment we have done. With this, I open up for the Q&A.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions are assembled. Participants, you may press star and one to ask a question. The first question is from the line of Manik Taneja from JM Financial. Please go ahead.
Hi, good evening. I hope I'm audible.
Yes, sir, you are.
Thank you for that. The first question was basically a clarification question on the HCLS business. We see a sequential decline in over the past relating.
Sir, sorry to interrupt you, but then your audio is not coming clear.
Yes. Let me call him. Sorry. I hope this is better.
Yes. Thank you. The line for the participant dropped. The next question is from the line of Diveyesh Mehta from Investec. Please go ahead.
Hello, am I audible?
Yes, sir.
My first question is, can you actually share again the guidance decline, what is the basis point impact coming from mortgage and collections? And also, can you share accounting standard, what was the impact coming from this change?
Okay. Hi, Diveyesh . The guidance revision, about 3.5%-4% is coming from mortgage and about 1% is coming from collection, 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 80-90 basis points.
Okay. My next question is that in the credit card repayment business, the delinquencies, as you said, are increasing. If you look at the various banks' commentary, all of them have been highlighting that customers now have a larger chunk of savings or bigger cushion. They are not expecting a big change in that number. What is driving your reasoning that the credit card business, the repayment side, can see a strong growth?
Look, both things are happening, right? As I mentioned, for the last three quarters, from the very low at the peak of COVID, when people had a lot of surplus cash, delinquencies quarter after quarter have been increasing. At the same time, people, you know, as the spend has increased, you know, you'll see more of that sort of come through in the delinquency rates. We had anticipated volume growth. You know, we've 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'll be additions and increased volume coming through to us. The second factor is, since, as I've been mentioning, we've been adding new clients from utilities, fintech, et cetera.
As those implemented and as those volumes come through from our side, as even new clients will slowly start placing more volumes from you, that kind of balance kind of builds up. As that builds up, those two factors combined are what are driving our collection forecast. We have been careful in incorporating how much lift we take from existing clients, and that's the balance we've been trying to strike in our forecast, looking at the volume flow today they have, and as we look at the guidance from our clients.
Okay, one last question. When you said that 13%-15% of the business will be mortgages, that was by end of 2023 or for FY 2023 or for the whole FY 2023?
for whole of FY 23.
Okay, done. Thanks a lot.
Thank you. Manik Taneja from JM Financial, please go ahead.
I'm sorry I got disconnected the last time around, and I don't know whether I asked my question properly or not. My first question was with regards to the healthcare business. We've seen a sequential decline on the healthcare side. The understanding was that we won a few deals there, and thereby one would see continued growth. From that standpoint, if you could help us understand what drove the sequential drop here. If there were any one-time elements of revenues in Q2, if you could call that out. The second question was with regards to the underlying shift towards India. If you could talk a bit of your comments there, given the labor cost disadvantage that one is seeing in Philippines as well as in the US. Thank you.
Manik, the second comment quickly first. Clearly, both the U.K. and U.S. markets have talent shortage at the front line level. To that extent, you know, I mentioned about Mexico center getting opened in March. Philippines we already had, but we've seen good demand. We've won a couple of deals that we are scaling up there. I think that recognition of considering offshore contact center and center processes in 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 BPM clients in U.K., right? I can almost see that as a broad trend. Obviously the scale is small and you need to kind of tease it out, right? The scale build-up is small.
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're putting together between Philippines, Mexico and India. As far as our healthcare mortgage and BPM 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 HPS 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, you know, it's kind of dealing with some of the remnants of COVID, not necessarily in terms of consumer behavior, but the government intervention in the reimbursement cycles are kind of going away in an inconsistent manner across different states. There are some minor puts and takes from a timing standpoint of when approvals come through, right? From different states on a provider business, then it kind of flows through to our clients and hence to us because it's outcome driven. Nothing secular or structural out there. We expect, you know, strong growth to pick up from Q2 onwards in healthcare. Overall, at the end of the year, we expect strong growth from HPS and decent growth from the provider segment.
Sure. One last clarification question on the healthcare HCS's business. Over there, should one expect a typical seasonality wherein 3Q and 4Q should do much better than first half of the year, given the vagaries of the enrollment, the basic enrollment cycles with the American healthcare system?
There is definitely an uptick in Q3 and it bleeds over into Q4 because open enrollment period for majority of the population is leading up to December, right? That they're 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 line.
Sure. Thank you for the opportunity.
Thanks, Manik.
Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. A couple of questions. First, about the guidance. In the guidance, I think you alluded to weakness to persist in H1 and recovery in H2. Can you help us understand, let's say, next three quarters, how the trajectory look like, both from revenue perspective and margin perspective? Whether we are baking in too much for Q3, Q4, and which again carry 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%-4% is constant currency year-over-year when we say. What kind of cushions are we building for next three quarters? Second question is about healthcare business.
To some extent you alluded, but if you can throw some light on provider business. It seems weakness persist 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 slow compared to some of our peers. If you can throw some light. Thank you.
Thank you, Dipesh. Guidance. Overall, we expect that growth will pick up through the years. At an overall level, Q2 will be flattish compared to Q1. We kind of pick up. That's largely because mortgage will decline next year, and which will kind of eat away the growth in other sectors. Ex-mortgage, we expect decent sort of growth in other businesses in Q2, and that trend will continue. Once the Q2 decline starts to kind of arrest in Q
Sorry, when the mortgage decline starts to arrest after Q2, that will kind of show up more in the growth at the overall level. On your question of what is the compounded quarterly growth rate, at this stage, we expect that'll be between something like 3.2% to about 4%, between Q2 to Q4. That's on the guidance. As far as margin is concerned, couple of factors which are playing up on the margin. One, as the margin declines, 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 will taper off by next quarter.
That imbalance of direct cost, which is weighing heavily on Q1 and slightly less in Q2, that'll kind of finish off by end of Q2. That's one positive factor to the margin. Second, the actions we've taken on our indirect costs, whether it's leadership support as well as leadership and support or infrastructure, those actions have been implemented. Obviously, they have long notice periods and cycles from a facility and technology reduction. Those we expect to kick in from Q3 and Q4, and as I mentioned, we expect that'll lift our margins from Q3 by about 200 basis points.
Between the reduction of low indirect costs, the restructuring costs tapering off and the gains from indirect costs, we do expect that our operating margin should start to come back to around 11.5-ish, 12% by Q4 to end the year overall between 10%-10.5%. That's kind of the margin ramp that we see from Q1 to Q4. On the healthcare business provider. I think I had mentioned we had a strong sales quarter in Q4. After about 10 quarters, we had our highest sales in Q4. We continued with pretty much the same trajectory of growth in Q1 as well. This business has a long-ish implementation cycle, right? You get prospective placements from a client. 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 value chain, the service value chain, and by the time you recognize revenue, it kind of gets to be about sort of 6-9 months in terms of meaningful revenue. Those gains will kick off towards the end of the towards the second half of the year. That's one comment. Second, our business, as we have been saying, is kind of we are the leaders in eligibility and building an RM business, that has its own nuances. It's completely an onshore business. Since the last couple of quarters, we've stepped back and broadened the scope of where we play. We've put in a new team.
We're digitizing our offering, and we're also building up capabilities for mid-revenue cycles so that we can start to kind of cross-sell to our existing clients on some of the mid-revenue cycle opportunities where offshore plays an important part. We also see growth in some of our competitors who have much broader offerings and also they have offshore presence in that. 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 play. 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 RCM cycle of the US industry. Vineeth, anything else to add on healthcare or Ankur?
No, I think we are good.
Ritesh, just one follow-up on margin. Let's say in Q1 we deliver 8% EBITDA margin. You indicated revenue to be flattish in Q2, constrained mortgage business had been likely to persist in near term. Do you think this margin is also likely to remain closer to Q1, or you think now improvement will start from Q2 onwards? Thank you.
Thanks. No, improvement will start from Q2, Dipesh, because some of the cost action we have taken, and some of the restructuring will taper off. For instance, this quarter, and Dinesh can validate, comment on, this quarter we had about 60 basis points of impact from restructuring costs. That'll taper down to about 35-40 basis points in Q2, right? Some of those direct cost benefit will come in, and we'll see a lift in the margin from Q2 itself. Dinesh, anything else to add on Q2 margin?
No, that's right. I think the Q2 onward we'll start seeing a margin improvement because a lot of cost actions have been taken and some of the costs have already been taken out. we'll see the improvement.
Thank you.
Dipesh, do you have any follow-up question?
No, thank you.
Thank you. Next question is from the line of Shraddha from Asian Markets Securities. Please go ahead.
Hi, Ritesh. A couple of questions from my end. Can you quantify the mix of servicing and origination in the mortgage business segment around?
Shraddha, for the year at this time, actually for this quarter, I'm just getting it. For the end of this year, we expect we'll be between two-thirds servicing and one-third origination. At this point in time, we are at about 40/60 between origination and servicing.
Ritesh, if we really look at what happened in this quarter, we had guided to mortgage being at $30 million-$32 million run rate in Q1, and that is where we actually landed at. The miss in this quarter was more to do with the other businesses than mortgage actually. Is my understanding right?
Partly. Look, we were expecting that we will taper off. We'll kind of find the new equilibrium from Q2. You know, towards May and June we see sliding down of revenue, and hence we are seeing a significant decline that you see mortgage quarter-on-quarter between Q1 to Q2. That has an impact on cost and margin significantly, right? Because, you know, you have your revenue starts to tail off sort of mid-quarter from where we wanted. Yes, we are broadly slightly lower than where we wanted for Q1, but it's the Q2 and the lower base for Q3 and Q4, which is a big driver for our guidance revision.
Right. What kind of a decline are we now building in for 2Q, if you can give some sense on that? Do we expect a further decline in 3Q over 2Q or, 3Q or 2Q I mean, 3Q should be more steady state or are we very Q2?
At this stage, we are expecting Q2 on mortgage to be closer to between, let's call it $25-26 odd million. It'll 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'll pick up from Q4.
Right. Sir, just on the 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?
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+ million, right? Now that's a business which will pretty much halve. To that extent, you know, we are realigning the support infrastructure across the functions for that lower base. Second, as the business for mortgage has declined, obviously across the pyramid, we've had to reduce some of the, you know, the talent cost there. At the senior level we have stability, but you know, at the operating level, at some of the solutioning and stuff level, we've had to kind of recalibrate the business to the new reality of the volumes.
Right. Just one last bit on the two acquisitions, how are cost synergies playing out in both StoneHill and ARSI, if you can talk more about that?
Sorry, to say that, cost synergies?
The cost-saving synergies in both acquisitions, how is that playing out?
The ARSI acquisition is playing out well, right? It's integrating well. We had mentioned that they had lower margins than us, and it 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 significant decline in the industry on their revenue. Given it's a platform-based business, it has impacted their margins pretty significantly. We've had to recalibrate their 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 activities, we saw that they stabilized in June and in July also we've seen strength in their business. At least there is stability now and they obviously will recover a little bit ahead of the core business given their once there's stability in the secondary market transactions, it shows through in volumes of QC and due to StoneHill. So margin-wise, they are kind of on revenue-wise, they're stabilizing. Margin-wise, you know, they were worse off they were worse than where we anticipated, primarily because it's a platform business. I think it'll take us till end of the year to bring them back to a reasonable level of margins.
Right. Just one last thing. The guidance was around constant currency CC basis. It is at 2%-4%. Assuming 250 bps cost CC has been given a 30% exposure to AR that we have. In dollar terms, we might actually see a decline in revenue this year versus 2022. Is this understanding right?
Dinesh?
I don't think we have done that working. it can be because our rupee is at 79.80, so it's a year-on-year basis that shifts. Plus I think dollar GBP also trending lower. It is not 1.22 and 1.24. It can. We've not done the working. I think we'll share with you once we are done.
Last time we had indicated that the guidance. Sorry. Please carry on, sir.
No. One other thing, Sadhana, that we have about 30% of the business coming from UK, right? That obviously will be exposed to this movement. To that extent, we will have an impact on our revenue.
Right. Sure. The last time we had spit out the guidance in terms of organic and inorganic, we had expected almost a 600 bps contribution coming from acquisitions. Is that number still the same or has there been a change of mix between inorganic and organic contribution now?
I am looking. Good question. I think, so first of all, as I mentioned, excluding the impact of both, mortgage and full year impact of acquisitions, we expect growth of 16%-21% for this fiscal, which means that other businesses are performing strongly. On the organic, sorry, the inorganic impact, I think we'll see some trimming. As I mentioned, ARSI is part of the selection cycle, so there'll be some trimming, slight trimming there. StoneHill has also been impacted to some extent. I don't have a quantified, we can answer later, but I think it'll be slightly lower than the 6% impact that we expected from the acquisition.
Sure. Thank you, sir. That's it. Thank you.
Thank you. Our next question is from the line of Sachin Kasera from Schroders Investments. Please go ahead.
Hello. One thing is that if you could give us some sense on your vision for more like a 2-3 year perspective, because of this heavy dependence on mortgages, we had a very big impact on our numbers. Are we looking to build a company so that, you know, we are more diversified, both in terms of geography as well as in terms of vertical, so that we again do not have the same set of mistakes? If you could just give your broad vision of, you know, post this month that we are seeing or everything we are seeing, how do we see the company in FY 2025?
Thanks, Sachin. Let me just quick comment on mortgage before I get to the overall vision. Look, mortgage is a volatile business, right? It's a more dynamic business. It's linked to economic cycles.
....
We know that. Typically these cycles are 4-5 years, right? These cycles work in that form of interest rates decline, refinance becomes very viable, et cetera, et cetera. 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 2 years. At the other end of the cycle, when the economies come out of this and you've seen sort of successively increasing action and the pace of the action which the Fed is now doing has not been done in the last 40 years. With those sort of actions, the decline is also very precipitous, right?
This cycle instead of five years has got compressed to two years on both ways, on the way up as well as the way down. Which has given less time to the industry, our clients and us to prepare for this kind of thing. Fundamentally solid business, right? As we go forward, we think from the start of the cycle to now, we have you know 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 you know so that origination becomes the smaller part. There are other pockets and products like home equity home improvement, other parts of the value chain we can play.
Take this expertise and expand into consumer lending or other parts of BFS, right? Take some mortgage and go to other parts of consumer lending. Take this core and we can expand into multiple ways, right? 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 2023, mortgage will be about 13%-15% of our business, which means that rest of our business is less linked to economic conditions. That's why we've been investing in healthcare growth. We like healthcare, both payer and provider. We've been investing in CMT, and we've been investing in different parts of the CMT, for instance, digital media, edtech, etc.
We are also starting to think about, you know, as I already talked about delivery dependency kind of coming onto 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 said, if you take X mortgage, if it's a 16%-19% growth going into next year, when mortgage becomes a smaller base and it has stabilized, I would expect that we will deliver even at the reported level good top quartile growth for the, you know, for the BPO industry.
We will be able to kind of give that consistently once we have this portfolio realigned after this year's acquisition.
Sure. Secondly, we have a significantly good exposure to the U.K. economy, and yet again I've been reading that Europe itself is facing some sort of a recession condition, and the pound has also depreciated. What is your take on this and can this also give us a negative surprise, maybe if things deteriorate further from here, say Q2 or Q3? Could again lead up to some sort of a revision guidance or outlook or anything like that, so negatively?
No, look, yes, the U.K. economy is also going through a pretty tough phase. There is political uncertainty, there is economic conditions, high inflation, high energy prices which are impacting the economy and the populace there. No different as such from the U.S. economy. In general, when companies have pressure, you know, outsourcing is a good answer. It is playing out in U.K., it is playing out in U.S. at mortgage. We've seen good demand. Q1 was very strong quarter for U.K. Looking at the ramp up that we have in play as well as the pipeline, we feel good about the growth in U.K. for this year and going into next year.
The softness in the economy, we are seeing demand in BFS, we're seeing demand in CMT and in the mortgage within the UTP segment, we're seeing demand there as well in the UK market. The impact of pound softening, that will play in our financials. Dinesh has kind of covered most of it. From a foreign exchange exposure. For now, I don't expect any downside risks from the UK economic conditions weighing on our revenue and margins. Vinesh, feel free to add to it.
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. All offshoring is that you know that we already covered one year at a average rate of 114 while your current GBP is around 95, 96. That covers.
Sure. One question on the net debt. It had gone up significantly last two years because of acquisitions. What is your thought process there? Would we now look to reduce the net debt before we do any major acquisition?
I think this quarter we reduced the debt because all the cash flows have been utilized only for that purpose. I think I said in the past also, I think the debt level is like hardly 40-50% of the working capital which we have. We've not taken Really the long-term debt for acquisition is more a cash flow which we utilize. I think it's better to protect the interest rate, we have converted some of the working capitals to a debt, which is 2-year and 3-year. Those are purely these are money utilized for working capital. I think I'll say that these are all debt which is for working capital and in that way. I don't think there's anything else specific there.
No. The surplus cash that we'll generate post the payout, we intend to, again, look at some acquisition opportunities or we'll prepay the debt that was mentioned?
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. We continuously look into market, continuously evaluate opportunities as they come aligned to our growth trajectory. At this point in time, nothing specific to report on that aspect.
Sure. Just last question on this margin in healthcare. QOQ I can see some significant compression. I don't know if you covered that, but there seems to be a significant compression in the margins of the healthcare vertical versus the last quarter. I don't know if you
Yes
commented on that or in case I missed it.
Sure. No, happy to comment. Couple of reasons for healthcare margin compression. One, the Q4 margin was higher because there were one-off items that had taken the margin up for Q4, and that effect normalizes that kind of shows up in Q1. Second, given some of the wins and the focus on execution, we've kind of started implementing costs comes before revenue. That is another part of normalization which we'll see. Third, you know, as I 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 in that business, that will also contribute positively to the margin. This quarter it impacted the margins for HCLS services. These are the three reasons why we saw a sequential decline on healthcare margins.
Fair to say that Q4 was a little high because of one-offs and this quarter it's lower because of one-offs and hence the compression looks much more than you say?
Exactly.
Would you be able to quantify these one-offs, approximately how much was the one-off in Q4 on the positives and how much on the negatives on this quarter?
Dinesh, do you have that?
I think we need to have an exact in a percentage term, but I think there are three reasons which Vipul said. I'll suggest that there are 25% reason for the last year, but a 25% reason for the current year, which is mainly the investments and due to the new businesses which you have taken where you have a cost of growth which comes into play. I think that was the more bigger reason.
Okay. Okay, thank you.
Thank you.
Thank you. Next question is from the line of Chirag from Ashika Institutional Equities. Please go ahead.
Hello. Can I ask you?
Chirag, there's a bit of disturbance coming from your line. Can I request you to speak through the handset?
Now it's better?
Slightly better.
Sir, I have a quick question with respect to the margin levers which we can use to maintain our performance of what you guided. Please throw some light on what are the levers we have. X mortgage, if our business model is under transition phase from a next fiscal year perspective, then also will this lever impact or will it be changed? Guidance from 3-4 year perspective on top line growth.
Margin levers available to us, as I 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've initiated those actions. We'll see some benefits in H2, and we'll see some more benefits come through in next year as those actions kick in. Three, obviously, when you transition this level of business to growth, you know, the SG&A as a percentage for the company, it becomes bigger. Once this effect wears down, the SG&A itself will normalize as a percentage, and that will add the scale effect to the margins.
Between those three factors is where we see margin coming back to historical levels by end of the year. 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'd like to get to a place where every year we can improve our margins by about, you know, 25 odd basis points through operational efficiency, et cetera. We had delivered that in leading up to FY 2022. This is a year of recalibration, and I think we'll continue that journey once this kind of wears off from FY 2024 onwards. The same for revenue. If you look at revenue, FY 2022 ex mortgage, we grew 14%.
This year ex-mortgage, we are saying we'll grow 16%-19%, not counting the impact of acquisitions. We do expect to continue in the same way to deliver double-digit growth right in line with top quartile BPM company for the next 4-5 years. I think the foundation of business, and if you look at last three years' trend, we are reasonably confident that we are on track to deliver that. Chirag, we are unable to hear you. May I request you unmute your line, please.
Hello. Have you started the wage inflation pricing to the customer contracts on client side, I mean, increasing the project costs and all the other due to inflationary environment?
Yes, we have been at it since last year. Some of our contracts have automatic sort of kicking, especially for onshore delivery, right? As the index changes price changes. For others, we have been negotiating. There are obviously some lag in some of the business. In general, I'm pleased with sort of how clients have responded to the rising wage inflation.
Okay. Thank you, Prasanth.
Thank you.
Thank you. Participants, you may press star and one to ask a question. Next question is from the line of Sonal from Bohra Investment Advisors. Please go ahead.
Thank you for this opportunity. I have two questions. Firstly, on a Q-on-Q basis our depreciation has declined. What is your 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 a nd some of these price increases are part of your contract. So in outcome-based contracts also, are there such clauses of price increases in your collection business, you know, a direct pricing based on outcome, considering the rising inflation or would the pricing be same, you know, because it's, you know, outcome-based?
Let me answer the pricing part and then Dinesh can answer the depreciation question. 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 our value lever to counter rising prices in general. It's mostly on the input-based, FP-based, where we kind of have either automatic or negotiated price increases.
On the depreciation front, I think that some of the facilities which have completed their depreciation period, so there is a slightly lower charge this quarter. I think as you've seen the CapEx which we are investing, probably it will be range bound. I don't think it will increase to that number of Q4 levels, but I think it will range 2-3 crores here and there. We did INR 69 crore the last quarter. We are at INR 65, 64 crore. I think it should be in that range of INR 65 crore-INR 68 crore. I don't think it will materially change.
Sir, lastly, I didn't get, so maybe you answered this. In case of your healthcare business, you weren't expecting growth in this quarter. What, if I remember correctly based on my past discussions and, why didn't that materialize?
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, T his has been a quarter of execution on healthcare. On the health plan side, it's kind of, it didn't show up in revenue primarily because we have $1 deals. We are focused on executing. The pipeline is there. We know the acquisition pipeline. It will pick up Q2 onward on the health plan side. On the provider side, we had projected that the growth will come in later part of the year, right? The sales have happened. They'll start to kind of kick in later part of the year. Next year in provider you'll see more expression of sort of the COVID impact going away.
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.
My question wasn't actually about structural part. I was trying to just understand. This healthcare, are you saying that was in line with your expectations, when you had a Q4 call or this is-
Yes
Has it been a change in Q1 compared to your expectations?
Understood your question now. No, I think broadly in line with our expectations. This isn't something which we not expected.
Great. Thank you so much.
Thank you.
Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.
Hi, Ritu. Thank you for the follow-on opportunity. Just wanted to understand the fact that you spoke about us aspiring to be to match peers on growth for the high-growth BPO company. Should we probably expect that number, too, given the fact that while mortgage would have reduced to a much smaller size, but we have the top line, which is not such a very high growth account. With almost 30% of portfolio should probably have a subdued growth. In that context, do you expect to get back to double-digit growth next financial?
Manik, I think I got the structure of your question. Your voice was a little bit in and out. You're saying that with the reduced mortgage portfolio, are we confident of getting double-digit growth next year?
Yes, that's correct. That's correct, Ritesh Idnani.
Manik, as I just said, if you look at it, right, last year, FY 2022, ex mortgage, we grew 14%. This year, ex mortgage and even excluding the collections and mortgage acquisition, we are projecting 16%-19% growth. The foundation for healthcare, CMT, and BFS business, including UK and the collection business, I think are good businesses. They are showing what they've shown in the last two years. I feel good that we'll be able to deliver the medium-term growth that we've been talking about, the low to mid-teens.
Sure. Just one MAP clarification question. When you talked about 2%-4% YY growth outlook that you 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?
On a year-on-year basis.
I actually couldn't understand the comments that you guys made around the second quarter performance. Should we expect
Yes
Is this to be sequentially flat? Should we probably expect a YoY flat quarter? If you could clarify.
I said, Okay, so it is sequentially flat. YoY, I think it'll show up growth. It is sequentially flat because mortgage will see a decline while other businesses will increase. That's the math of it. Does that answer your question, Manik?
Sure. Thank you. I'll take the discussion offline because as of the asking rate for sequential, it will be very significant given two Qs flat on a sequential basis. I'll take it offline. Thank you.
Thank you.
Okay.
Next question is from the line of Sonal from Bohra Investment Advisors. Please go ahead.
Thanks for this opportunity again. My question was pertaining to claims business. The claims business.
Claims business.
You know, the credit card recovery business and you know.
Uh.
The claims which you get based on outcome basis. That business didn't do well, you know, in the last few quarters. Now since people are talking about the slowdown, you know, would that be a major part of your growth by this year and when do you expect that business to pick up? Is it based on lag relationship, I understand?
You're right that collections is countercyclical business, right? When the economies go soft, collections in general does well, because, you know, people start to fall behind and stuff, and you have much higher collections than when the economy is good and everybody's kind of making a lot of money and has a lot of cash. That's the classic economic cycle. This one, because we're coming off pandemic and people had a lot of cash surpluses, the buildup of that is something which is taking time. It's not following predictable patterns. That's why we were a little careful in terms of forecasting what we originally thought. 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.
As I said, we've also been diversifying beyond credit card as new payment methods come into BNPL, fintechs come into play. We've been targeting them, and we've 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. We wanna make sure that we start young with them, and as they grow, we grow with those, you know, payment companies. That will become a reasonably chunky portion of our revenue as we go into this year and next year.
My other question was little bit mathematical, you know, from your healthcare business side. Let's take your healthcare business revenue to be INR 100 or any assuming no acquisition or assume the base for FY 2023 and going forward is same. Now, because of health emergency benefits, if the base was INR 100, just with that going away, what could be your revenue? Would it be INR 110? Would it be INR 105? Would it be INR 115? Just to understand the impact of this one-off versus, you know, the various initiatives you have taken, you know. That would give us a good perspective of how the benefits shaping on the health effect.
Sonal it's a little bit of a complex answer. Public health emergency is one of the contributors going into this mix, right? I'm happy to take it sort of offline on how this plays out. 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. There are multiple sort of complexities and when you add the fact that it's a state-by-state answer and political leanings, et cetera, play into that as well. It's a little bit of a complex equation that we deal with. We can take more offline and I'll give you more color on that.
Sir, when do you expect this to be off? Or it's been already announced that there's an end date for this.
What they've been doing is because it's a political decision, they've been kind of pushing it out, right? Earlier they said it'll be February, then April. Now it kind of looks at midterm elections coming there. They've said it'll be more towards the end of the year. They keep taking a call to say extending it. As I said, it's not as black and white because some of the states have already started to prepare for that. You know, depending on whether which is your political leaning. Some of the states have already started to plan and put in place on stopping some of those reimbursements. It's kind of a mixed bag answer, not a big milestone event which will kind of say, "Okay, this now goes up or this goes down.
Great. Sir, in terms of, you know, just to understand your forecasting of your revenues, what the assumptions are, what kind of assumption around this measure have you assumed in your forecast of, you know, X mode gate? Is this contributing significantly or not assumed anything to you on this front when giving, The forecast? Because forecast is as per the assumptions.
Sorry, Sonal, you're saying what are the assumptions which have gone in the-
No, Regarding this particular measure of health emergency, you know, because you said that, you know, it will have a single-digit benefit. I'm trying to understand, when you're guiding for this, are you assuming significant benefits from this in FY 2023 or you're not assuming this measure because we don't know when this measure will go and you said it's been postponed. Have you assumed anything? Have you assumed something in between or you assumed, F ull recovery in this forecast from this health emergency benefits?
At this stage, we haven't assumed any uplift from this milestone coming through. We expect it'll kind of slowly unwind its way through the year, so we don't expect a big chunk or a big uptick just because of that event. It'll be the other factors of building our business where we think you'll see growth.
Thank you so much. That's very helpful.
Thank you.
Thank you.
Ladies and gentlemen, that was our last question for today. I now hand the conference over to Mr. Ritesh Idnani for closing comments.
Hi. Thank you. Everyone. Look, this is a year of recalibration. It is a difficult period, but I think the actions we've taken, the investments we've been doing building our businesses give us confidence that we'll kind of work through this and deliver the growth that we are now talking. Thank you for your engagement, and I look forward to talking to you again.
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.