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Firstsource lenders commit funds to reduce FCCB gap

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Rajesh Subramaniam, the managing director and chief executive officer of the Mumbai-based business process outsourcing company Ltd, is confident that the company is back on the growth track.

An improvement in profitability has also helped the company receive in-principle commitment for funds worth $40 million (Rs 223 crore) from some of its lenders to reduce the foreign currency convertible bonds (FCCB) funding gap.

“With the rupee depreciating, the funding gap has gone up from $65 million to $80 million. We have six lenders on board from whom we raised $180 million loan some time back and we are working with them to fill this gap,” said Subramaniam. “We do have a couple of lenders who have committed in principle almost half the funds required for filling this gap.”

Firstsource has an outstanding worth $237 million that matures in December 2012. FCCBs are a type of bonds that can be converted into equity at maturity. If the share price of the issuer has fallen since, the investor could ask for redemption of the bonds in cash.

He added the company would be able to refinance its FCCB before the due date, but with rupee depreciating, it was not easy to raise fresh loans. As of June 30, the company has cash reserve of $135 million (around Rs 750 crore).

Though FCCBs are hanging like a sword, the company has been able to improve its profitability and operations. “We are back on track. The change in structure that we incorporated a few months back is now playing out,” said Subramaniam.

Firstsource’s profitability for 2011-12 was under stress as it was not able to sustain its performance due to cost escalation, ramp-downs by clients and a huge FCCB debt that impacted the firms stock performance.

But that seems to be changing. For the June quarter, the company reported a profit after tax of Rs 29 crore, up almost three times from Rs 10.9 crore year-on-year and 25.6 per cent sequentially. The firm’s Ebita (earnings before interest, taxes and amortisation) margins declined 25 basis points quarter-on-quarter, largely due to cost of growth for new deals and wage hikes. The firm's stock post its results announcement went up by 9 per cent. On Saturday the stock hit an intra-day high of Rs 9.54, up 2.25 per cent from previous close. It closed at Rs 9.23 per share, down 1 per cent.

Other than changing its structure, Firstsource has also moved away from deals, especially in the domestic market, that would hamper its profitability.

“The problem in the domestic market is that players think that pricing discount is way of life. We have said no to deals in the recent past if it impacts our margins. Rather we have increased pricing in some of the deals. One of our key telecom customer saw pricing going up for it by 5 per cent. We have also asked another large domestic client for a price increase of 12.5 per cent,” added Subramaniam.

The bright spot for the company has been ramp ups in its international business, especially in the telecom and media, and healthcare space. Till last quarter the company had a pipeline of total contract value worth $160 million. “We are seeing lot of traction in our healthcare business. With a lot of standardisation and regulatory requirements we are seeing the pipeline in the ‘payer’ side of the healthcare increasing. We expect that over the next two to three years this business will grow around 20-25 per cent. Similarly the ‘provider’ side of business is also expected to grow by 5-7 per cent annually,” said Subramaniam.

The US healthcare systems has two aspects, payer and providers. Payer consists of health insurance firms and providers cater to the hospital and physician segment. During the quarter top clients also grew at a healthy rate. Top client recorded 24 per cent q-o-q growth increasing its revenue contribution to 14.3 per cent from 12.5 per cent in last quarter. Top 5 client’s revenue share also went up to 44 per cent from 39.8 per cent in last quarter, recording 20 per cent q-o-q growth.

According to Subramaniam, the change in the structure of the company is also helping it to tighten its belt and focus on efficiency. “Earlier we were vertically aligned, with each vertical having its own operations and support functions. On an overall basis we could not measure our utilisation level. Now with horizontal service delivery units aligned to geographies, the accountability resides with a few people. In our Collections business which is still facing some pressure, we are aligning our capital cost based on the performance rather than investing upfront,” said he. The seat factor for the June quarter was at 77 per cent

After FCCB the other concern at the company is high attrition. Its attrition for the domestic business was at a of 97 per cent this quarter. Attrition was high at its onshore operations to 38.9 per cent, and offshore was up 63.9 per cent.

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