India-HQ’d BPS pure play Firstsource is continuing to deliver an improving margin performance in Q1 as it exits low margin contracts and makes efficiencies across its operating divisions.
Q1 revenues were up 6.5% to Rs. 7.19bn (£76m), although essentially flat q-o-q, and EBIT profits almost doubled to RS. 624m (£6.6m) from Rs. 334m (£3.5m) a year earlier. This pushed Firstsource’s margin up to 8.7% from 4.9% last time - and effectively flat on the previous quarter.
The UK now accounts for a third of Firstsource’s revenue, and here revenue was up 10.6% to Rs. 2.49bn (£26.3m), although EBIT margins took a hit, down to 11.2% vs. 16.3% last time, which we suspect was largely due to investments ramping up for up a big new deal with Sky with two new UK delivery centres in Belfast and Cardiff (see here). Firstsource is also winning new business in UK&I, securing a customer management and complaints management contract with a leading UK financial services company, and a customer insight analytics and consulting contract with a leading Irish Bank.
Firstsource is managing its cost base better under new owner RP-Sanjiv Goenka Group (RP). However it is still way off Indian-HQ'd rivals Exl Service and Genpact, which are making double-digit margins. Firstsource’s focus on call centre services and tier three cities in India means it suffers from high attrition, and this is a continual threat to profitability. In fact in Q1, attrition on an annualised basis was running at over 100% for the domestic India and Sri Lanka market, up from 88% in Q4. Also concerning is that onshore attrition is up at c40% vs. 34% in Q4. This means that Firstsource has to invest heavily in recruiting, training and then keeping staff.
With the cut backs to low margin contracts, and its BFSI collections business apparently also facing headwinds, Firstsource is only expecting ‘moderate’ revenue growth in FY14. But it said margin improvement will continue.