Firstsource Solutions Limited (FSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ankur Maheshwari from Firstsource Solutions Limited. Thank you, and over to you, sir.

Thanks, Janis. Welcome, everyone, and thank you for joining us for the quarter ended June 30, 2020 earnings call for Firstsource. To take us through the results and to answer your queries, we have with us Mr. Vipul Khanna, our MD and CEO; and Dinesh Jain, our CFO. We will be starting this call with a brief presentation, providing an overview of the company's performance, followed by a Q&A session. Do note that the results, the fact sheet and the presentation have been e-mailed to you, and you can also view this on our website, www.firstsource.com. Before we begin the call, please note 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. With that said, I now turn the call over to Mr. Vipul Khanna to begin the proceedings.

Right. Thanks, Ankur. Good morning, everyone, and thank you for joining us today. I hope that all of you are -- and your loved ones are keeping good health and even better spirits in these times. Today, I would like to share a quick summary of our Q1 performance and our response to the ongoing pandemic. I'll also share an outline of our growth framework, review our segment performance for the quarter and also give a quick view of the outlook for the full year 2021. I will then turn the call over to Dinesh to cover our detailed financial results. So diving in. First off, I'm pleased with our performance in Q1. We have had a better-than-expected start to the year. Revenues in this quarter grew 1.6% year-on-year in constant currency. And the EPS for the quarter came in at INR 1.27 compared to INR 1.32 in Q1 last year. When we last spoke, we had anticipated a more challenging operating environment and had guided to a 7% to 10% sequential decline in revenue. Given our strong client relationship and proactive management to the pandemic impact, we limited the sequential decline to 4.3%. Our operating margin expanded sequentially by 20 basis points versus a guidance of 150 to 200 basis point contraction. Our investment in sales and solution organizations are beginning to show green shoots. The sales momentum is building nicely, and we added 10 new logos in this quarter. I'll get to numbers more in a bit. I'm extremely proud of our organization's ability and resilience in responding to this epic pandemic. Last quarter, I'd outlined each strategic initiatives we set up for shifting to a distributed environment and rethinking the future. We've here tracked, each of which is led by a key leader, focused on rearchitecting our entire business value chain and -- to remote operations. Everything, from hiring and training new employees, engaging clients and associates, and delivering every day high-quality, all the way to how to sell and transition remotely has been redesigned for a distributed operating model. Firstsourcers around the world adapted to the new model with empathy and comradery to serve our client's recalibrated needs effectively. As such, we largely mitigated the impact of pandemic to our business. The new hybrid operating model of work at-home and work at-office is performing well despite the volume volatility in certain businesses. Shifting gears to our growth framework, building on our conversations over the last few quarters, let me outline the 3 key elements of our growth framework and accordingly, the refinement to our revenue reporting. These 3 elements are focused on core industry processes; modernized offering, powered by our digital-first, digital now approach; and a scalable and agile organization to drive a growth position. Starting off, the first element is the vertical steps in BPM. We are focused on 3 industries; banking and financial services; health care; and comms, media and tech. And within them, on specific parts of the industry value chain. Each of these industries is grappling with structural changes brought about in their technology, changing consumer preferences, regulatory policy and of late, macroeconomic factors catalyzed by the pandemic. We've built trusted client relationships and a solid domain foundation over the years. We believe this provides us with competitive leverage to help our clients navigate this structural evolution. I believe it also affords us the privilege of winning over new clients with impactful offerings. The intent is to scale our industry vertical BPM offerings through the following actions. A, enhance and domain-touch into adjacent areas of growth. For example, building on our mortgage servicing capabilities, we are expanding into view-point servicing. For health plans, we are expanding into provider network support, building on our historical strength of claims adjudication and member service. Strength in action, building and scaling platform solutions for sharply-defined opportunity areas. For example, our engagement solution provides next-gen eligibility services within the RCM value chain for health care providers -- I'm sorry, and focused solution provides next-gen eligibility services within the RCM for health care. And third, contextualizing and cross-selling the full suite of our offering to an expanded client base. With this longer-term strategic focus on managing each of these key industries holistically, we think it makes more sense to shift our primary reporting breakdown to these 4 industry verticals; banking and financial services; health care; comms, media and tech; and lastly, diverse. Diverse includes our early forays into utilities and government entities. Digital is the second element of our growth framework. Now we've been talking about it. Digital is now pervasive and transient, up and down the value chain for almost all industries. We are significantly strengthening our contact center and back office offerings to better serve the contemporary needs of modern consumers and enterprises. Bot automation, analytics, digital operation management tool kits and a talent base having new-age skills are the building blocks of our Digital First, Digital Now approach to all the service offerings. We are therefore introducing a secondary revenue segmentation of key service lines, digitally empowered contact centers or DECC. We have revamped our contact center offerings by using a mix of in-house tools and world-class product partnerships. DECC services the omni-channel on-demand needs of a modern enterprise. And I generally believe that the magic within all this lies in applying there digital elements in the context of our clients, or in industry problem to deliver specific business outcomes. The second service line is intelligent back office. Our intelligent back office makes processes lean and agile by deploying a broad range of automation technologies. This frees up human bandwidth and ingenuity to handle complex workloads and lose creativity. The third service line is platforms, automation and analytics. We believe a big part of the BPM demand over time will morph into BPaaS or platform-based services. We are focused on purpose-built platforms for solving specific industry pain and/or opportunity areas. For example, the digital collections platform for cards and health care receivables management and the digital intake platform or health plan claims and correspondence. Both these platforms delivered dramatically better outcome for clients and higher margins for us and scale up. Automation services for client's retained operations is an ongoing focus area as we talked in the past. All these 3 service lines will scale up organically by building a strong client preference ecosystem. And also inorganically, will establish adjacent capabilities and obtain market access in newer areas. The third element of the growth framework is to build a scalable and an agile organization that derives skill sets to support our vertical and service line growth ambition. We have now realigned our organization to an integrated vertical service line structure. In addition to the market leaders onboarded in the last 6 to 9 months, Prashanth Nandella joined us in June as the Global Chief Operating Officer. He will be responsible for more tightly aligning our global operations footprint to drive synergy and operational excellence. His early focus is on deploying next-gen ops management tools, accelerating digital skills development and enhancing employee experience. We have also been strengthening our platforms organization. We recently onboarded product strategists for our health plans and digital collections platform. And the investment in our sales and account management organization is continuing as plan. [indiscernible] Next, I would like to review our segment performance. Our Banking and Financial Services segment grew 57.7% year-on-year or 46.9% in constant currency. Our focus and investments in Mortgage, Collections and U.K. Retail and Commercial Banking are now starting to yield very superior returns. These segments are benefiting from macro tailwinds of low interest rates and government support to small businesses and individuals in U.S. and U.K. Mortgage origination demand for refinance and new home sales continue to be strong. In fact, new home sales are at their highest since 2007 in the U.S. Collections businesses benefited from higher collectibility per account in the quarter. As the U.K. economy opened up, we saw a volume uptick and increased demand from BFS clients in the later part of the quarter. Overall, we added 6 new logos -- BFS logos in Q1, including another win for our mortgage post-closing platform. Collections and mortgage default servicing are countercyclical. As the credit quality deteriorates, we anticipate an uptick in demand in these segments. BFS vertical remains our primary growth driver, and we expect this trend should continue for the next several quarters. Shifting to health care. Health care declined 2.5% year-on-year and 10.1% in constant currency terms. The industry is experiencing volume compression in Q1. Shutdown or shelter-in-place orders in a number of U.S. states and patients delaying elective procedures impacted both hospital visits and health plan claim volumes. From our conversation with clients and industry associations, hospital visits and admissions fell by 40% to 80%, depending on location and procedure type in April. By June, they had climbed back to about 75% to 90% of pre-COVID levels. I must say volatility remains. After the July spike in infection rates, some states have reinstated the elective surgery restrictions, although we believe that hospitals are better prepared now. And even if there was a major surge, the impact will not be as bad as we saw in April. We are encouraged by the pickup in new deal decision-making as the quarter progressed. We signed 4 new hospital clients, including a strategic partnership with a top 20 hospital system. While the provider business' recovery will be gradual, we are seeing good traction in the payer business with a solid pipeline build and deal activity. Our digital intake platform, Sympraxis and DECC solutions form the kernel of our conversation with health clients to serve sticky problems for them. We are also excited by a small but consequential win in the fast-growing telehealth and remote patient monitoring segments. Comms, Media and Tech declined 35% year-over-year or 38.1% in constant currency. This is primarily due to a state rebalancing by our largest client in Q1 2019, you'll recall that, and the pandemic-induced volume compression in Q1 of this year. From the steep declines in April-May, we witnessed meaningful volume recovery in June, and certainly enjoying watching cricket and ECL on Sky despite the empty stadiums that it’s playing too. And all those activities mean a validation of the volume uptake. We've earned a new logo, a leading publishing house in the U.K. This global deal will help transform the client sales and customer engagement processes. I'm very excited that it validates our revamped debt offering, the digitally empowered contact center. Finally, a look at our outlook for full year 2021. The pandemic continues to add considerable uncertainty and headwinds. However, given how Q1 has played out, I'm confident that full year March '21 will be a growth year. We expect full year revenues to grow between 6% to 10% in constant currency terms, and we expect operating margins to be in the range of 11% to 11.5%. An expansion of 30 to 50 basis points over FY '20. With that, let me hand over to Dinesh to cover the financial details for this quarter.

Okay. Thanks, Vipul. Let me just quickly take you through the financial performance highlights for Q1 of this new fiscal FY 2021. Revenue came in at INR 1,062.2 crore or $140.7 million. This implies a 1.6% growth in constant currency and 8.4% growth in rupee terms. On the margin front, operating margin or earnings before interest and tax came in at INR 117 crore, which is 11% of the revenue. And the profit after tax came in at INR 88.7 crore, which is 8.3% of the revenue. As mentioned in some of our earlier calls, margin performance year-on-year may not be comparable due to the investment which we have done in the organization from Q2 last year. On a sequential performance, was better than we anticipated in May, when we guided a revenue decline of 7% to 10% and operating margin decline of 150 to 200 basis points. Actually, we have delivered a better performance where revenue only declined by 4.3% in constant currency terms. And on the margin front, we have expanded by 20 basis points. Margin expansion was attributed to solid demand execution, coupled with the operational efficiency and tighter cost controls. We saw better volume across BFS and CMT in June month onwards. Given that 75% of revenue are delivered from the U.S. and U.K. geography, operation was less impacted, even though the April and May, as these offices were continue to operate in a controlled condition. In India, I think the controls or lockdowns were much, much stiffer. But I think we see a lot of -- we're able to get a lot of employees work earlier than expected, as the government started easing the restriction from the June onwards. Revenue from top customers saw a sharp decline. This was as anticipated as that -- they have shifted their focus on servicing only the selected customer. We are witnessing solid recovery. In Q2, we should be around 80% to 85% of our pre-COVID volume, and we believe largely it will be normalized by Q4. On a cash flow front, our operation -- from operation, our free cash flow generation has been quite strong. We generated INR 201 crore of cash from operation and our FCF, which is after adjusting to CapEx at INR 181 crore. DSO declined sequentially from 65 to 63 days, including the unbilled. This really shows the strong focus on our -- ensuring that we bill on -- customer on time and also maintained the collection. Closing cash balance as of June 30 was INR 204 crore, which is after repaying INR 86 crore on our working capital borrowing and utilizing around INR 40 crore for a stock purchase by swap trust. Net debt level stands at INR 553 crore or $73 million when compared to $86 million in Q4. Tax rate for the quarter is 14.5%. We expect that during the year, it will be ranged between 13% to 15%. On our ForEx hedging, as you're all aware of, the GBP is -- we have a hedging up to the next 3 years for value in GBP 65 million, and rates are ranging from INR 102 to INR 118 per pound. This is approximately 80% of our book. As we have seen the sharp depreciation in the rupee versus dollar, we have increased our hedges on the dollar front, which we normally -- very less on the dollar book. We always anticipate the rupee depreciating 3% to 4%. But looking at sharp depreciation, we increased our exposure of hedging to 65% (sic) [ GBP 65 million ], which is approximately $50 million, with an average rate of around INR 76.7. Overall, I'm very pleased with our strong collective effort to deliver this performance despite all the challenges at the early part of the quarter. Vipul have taken through detail on the rational of our breakdown of the revenues, which we are going to go -- going to show on a going-forward basis. From an accounting point of view, BFS, health care and CMT going to -- and diverse will be our primary revenue segment. Over and above, we are also going to be here putting up in the higher presentation and the fact sheet the revenue split on service lines, geography, onshore/offshore split and also the client concentration. With this, I'll open up this call for questions. Thank you.

[Operator Instructions] We take the first question from the line of Mohit Jain from Anand Rathi.

It's a good quarter. What is your view on top line if you guys are saying 4Q will be back to pre-COVID levels in terms of revenues? So should we see this as a growth account going forward? Or do you think that it will get back to normalized and then stabilize at that level, given that those guys are also not -- or not -- I would not say supposed to, but currently they are also playing in a saturated market, and their numbers are not growing?

Yes. All right. Thanks, Mohit. So look, our biggest client, I think you rightly identified, they are in a mature market. They obviously continue to innovate new products, new offerings and new campaigns. So there is a level of trade activity, which happens right through the year, and these obviously are exceptional times. This quarter, their operations, our operations were severely impacted by restrictions and social distancing and in India sort lockdowns, et cetera. So they shifted to emergency services only, and they served only priority customers for this quarter. They used digital channels more. But as activity has come back, they have kind of eased the restrictions. And as we commented, more volumes are coming to us, both in U.K. and in India. So June was a good month, and a good precursor to how sort of Q2 is developing. And as we said, we'll go back to sort of Q4 levels -- pre-COVID levels by Q4. There is some growth we've seen. Obviously, there will be some digital cannibalization, which will continuously happen and we have supported. We are participating with them in some of the digital set of deflections that's going to go on. But in the environment of a mature business, I think we are their dominant and primary partner. So we expect to maintain sort of our significant wallet share with them and sort of support them as they kind of operate in this environment.

So there's no-deal which you have built into this? Like, there was some deal which was pending, right, last year, wherein they were supposed to outsource a large part of their existing operation to you. So is that built into the numbers? Or this is like the business as usual as of 1Q FY '21?

There was an element of ramp, which we had done in Q4. We saw that in their March numbers of '20. That's kind of built into what we call the pre-COVID levels. But right now, there's normal sort of organic growth. There isn't a significant deal out at this stage with our top client.

And sir, second is on the reclassification of your new segments. What I wanted to ask was, earlier we used to see this as collections business and also as mortgage ISGN business. Now where do they fit into this new classification? And if you could split the growth outlook between the 3 segments? Because it appears that Firstsource maybe the fastest-growing company in FY '21 from an industry perspective.

So I think there are 2 things. Our primary segment is BFS, right? And BFS helpline...

But I was referring to the service line one, the one you have given digital contact center and then...

Yes. So we have kind of broken it down into 3 service lines, which kind of are more characterized by similar sort of operating models and sort of the digital investments required. So mortgage falls across all 3, right? We do call centers in servicing. We do some call center support in origination. We do some back office in servicing, and we also have a platform there, right? So we have revenue across all 3 service lines from mortgage. Collections, a big chunk is in sort of the DECC, digitally empowered contact center. And there is a portion of it in the platform segment, where the digital collection part of our portfolio in general.

So from a pure, pure contact center perspective, you're saying it is less than 48%, maybe 35%, 36% kind of service line?

Correct. Correct. So if you call out receivables management or the collection work we do for financial services and health care, the customer care and customer sales, right, the multichannels one, that will fall under the tech offering.

And growth will be evenly spread across these? Or like, for example, contact center has been falling over the last few quarters as per the new DECC? Or do you think that it is going to be more driven by platform-based services and more driven by back office processing than contact center?

Sure. So I think back office is growing strongly, right? As we push hard in Healthcare and in Mortgage, I expect it will have more -- a little bit more growth than DECC. And platform is a smallest portion, but we are very focused, right? I kind of mentioned in my prepared remarks. And I talked about a number of areas between Healthcare, Mortgage and Collections where we are launching these platforms. I expect that slowly, as adoption increases, as we sell more, the share of revenue for platforms will increase. But obviously, it's still only 8%. So it will take a while to kind of get there. So in that order, I would say, back office and -- back office will be slightly ahead, and then you'll see growth coming from platforms and DECC to follow.

Okay, sir. And lastly for Dinesh. There was this decline in employee cost quarter-on-quarter. So is there a revision, variable pay? How should we read it, while your headcount has gone up and onshore has also gone up, I think?

In that, the component which you may be seeing that [Foreign Language] there are people who would be on the furlough for the U.K. geography. And of that place, that is the more a cost recovery than being really the revenue. So that's the reason you may be finding something there. But otherwise, in a normal course, there is no exceptional things we have done from an employee comp point of view. They remain at the same levels at the normal course of business.

So this will get back to 4Q level as your top account trends up significantly?

Absolutely. Absolutely. That's right.

And sir, in the headcount, are they countered? The furloughed employees are counted as part of your employee base when you report 1Q headcount?

That's true. They are part of my employee base. They are only getting paid through the furlough scheme. That's the only difference.

The next question is from the line of Manik Taneja from Emkay Global.

Just wanted to get your sense with regards to the way our business mix, which is moving from a delivery perspective. Over the course of FY '20, we have seen the offshore delivered proportion which we increased through every single quarter. And although in the recent past having a much dominant local delivery in general essentially worked to our advantage. But how do you see this mix going forward over the next 12 to 24 months?

Yes. So Manik, we're not consciously choosing one or the other, right? If you look at the strategy, the focus is to go higher and higher up on the domain, right, in the chosen industry verticals. And this, in fact, depending on sort of the service we get. For instance, as we see more default servicing in mortgage pickup, that's more an onshore service. While if you see more origination, it's kind of now we've developed a great offshore engine where we are able to serve clients in a blended model between on and off kind of thing. So we're not choosing one or the other. Clearly, as we pursue some of these higher-end processes, like I have you the Mortgage example, similarly related to Healthcare, our debt demand for Healthcare is mostly onshore, right? The U.S. Healthcare segment is still looking for onshore offerings. But as we push our digital intake platforms Sympraxis, that allows us a lot of leeway on offshore. So at this stage, I don't have a sense of how it will play out in terms of one or the other. It's more -- we know these are the growth segments that we want to pursue from a further business development and growing our existing accounts. Dinesh, do you have anything else to add to that?

The next question is from the line of Rahul Jain from Dolat Capital.

Congratulation on good numbers and also completing on your first anniversary with the company. And as we have seen, there is a significant changes in your leadership team as well. So you have alluded about the changes in terms of structures and all those things. Just wanted to understand how some of this organizational change has changed the way the company would see the total opportunity in the market versus what it was like a year ago when you came in? So what things have changed? How the scalability element gets added to the picture? Where are the next easy fruits for you to pick up? And how the entire opportunity world has changed for you in this renewed structure as well as leadership team that you have installed?

Great. Great question. So I think a few dimensions to think about it, from a go-to-market and building the domain capability. We are now clearly focused on these 3 segments and Diverse, as we talked about. And within that, there are segments that we're focused on. Like, in banking, it's mortgage collections and the U.K. retail and commercial banking. In Healthcare, as I mentioned, we've sharpened the focus and have 2 separate leadership teams, 1 focused on providers and 1 focusing on care, right? So that's starting to bear fruit because we have the Payer segment starting to reboot the business, start to kind of build a pipeline of early opportunities and sort of seeding for midterm growth. While Provider, we are the leader in our chosen segments, and that team is working very hard in finding adjacent areas of growth, right, within the RCM value chain. Similarly, Comms, Media has been our historical strength. But with the new leadership and the right strategic focus on technology, or upon digital players, that's an added focus within CMT, so that we can target that fast-growing segments. So within our existing segments, we are looking for expansion through focused leadership. And then there are a few, like technology, we have chosen areas where we want to -- newer vertical where we want to grow. The other dimension of which to think about from a structure standpoint is that we want to increase our cross-sell, and we want to increase our specialization in some of the services. So digital services are -- which includes intelligent automation, analytics and digitally empowered contact centers. These are COEs that we've created, so that they can help each of the industry leaders go and do either automation or DECC within their respective segments, right? We've also brought in specialization at the product management level so that they can work with the vertical leaders to identify areas where we can -- where we find platform-made service opportunities and start to develop and scale those platforms. So that's kind of the vertical and horizontal kind of structure starting to kind of make an impact on cross-sell and develop specialization in certain areas. And the last element, I would say, is that with sort of the COO structure, we're trying to make sure that our delivery engine is more cohesive, our investments are more strategic and they are more spread across multiple rather than -- we're trying to do it at a business unit level. Now we're looking at the entire delivery base together and make sure there is joint accountability between the market leaders and the COO organization, for both revenue and margins and sort of building strategic capabilities. So with a more cohesive view towards delivery, whether it's investment in tools, whether it's what we do from people skilling and people engagement and people management, or delivery -- the delivery location strategy. All that when it's cohesive, it gives us the scalability to move faster as we increase our sales momentum. So that's how I would color the impact from the structure and some of the new leadership, which we've added to some of the more experienced leaders we had when I joined in.

Right. Just 1 more, if I may. A, if you could tell about the new vertical within the CMT space that you have widened after -- in your first strategy comment? What are the status on that? And secondly, are you seeing any of these -- your business vertical or service offering seeing an advantage of an acceleration post pandemic because of any shift, specific shift towards digital or any other technology landscape, which is driving increased traction for you?

Sure. So within CMT, if -- your question was around the progress on the technology vertical, right?

Yes.

Yes. So look, it's early days. We've started to build the market there, starting to kind of talk to some friendly customers, talk to networks to identify what are the sweet spots? The approach is, initially we'll take our existing offerings, which is DECC, collections of index and sort of the back office or vertical BPM, right? Those are our existing strengths to be contextualized for the tech company. And I think we have an early thought of newer areas, which are not as competitive in the marketplace where we could make a new -- where we could kind of get some gains. But again, very early days. We're starting to respond to some RFIs, RFPs. And we've had very -- 2 small, but sort of fintech wins to kind of get started in those segments. So early days, but I'm encouraged by sort of the possibility of BP and sort of the path lies ahead. But it's kind of given we are starting from sort of ground zero, this will be about a 4- to 6-quarter build to get sort of meaningful traction or meaningful revenues in that segment. The second question was post pandemic, what is the impact from a digital standpoint? So I think as service operations were disrupted, our BFS clients in U.K. our Healthcare clients in U.S., some of them came looking for surge capacity, right, to tide over. And we took that opportunity to build blended solutions, right? So where there is a human element, then there's a technology element. So meeting that sort of short-term demand with sort of sustainable solutions, which are more value creation because the blend of human and digital. It kind of creates stickiness. And we see that once we open into an account or sort of help clients in those critical times, with those more valuable solutions, there is a good possibility of those -- some of those kind of things rolling into permanent places. That's sort of one dimension of digital that I see. The second is as the volumes increase in the Mortgage business and the Collection business, very clearly, there is a clear demand for digital solutions, right? The demand is higher, people have appetite for better solutions and we think our offtake on digital collections for the post-closing platform is very high in places. Does that answer the question?

Right. Yes. Yes.

The next question is from the line of [ Kunal Kohli ] from [ Bowhead Capital ].

Sir, I wanted to get a broad sense of kind of sense considerably kind of you're making and the impact of COVID, and the kind of delivery you have done. What is the wide range of growth estimates one could have? Or what is your wish list, let's say, over next 2 years, from 2021 to 2023, I presume I think some of the initiatives you would have taken would start paying you off. So as investors, I understand it's difficult to give a guidance, but I'm talking about a wide range, from a more conservative to a more optimistic kind of growth rate, assuming all the initiatives you are doing fall in place. If you can talk more about it then. And similarly for the margin as well.

Yes. Just to make sure, your question is sort of what's the long-term growth rate that we're looking at?

Yes. So let's take 2021 as a starting point, because you've already given a guidance for 2021, and if we take next 2 years, by when I think the new management changes would have spent some time and some of the initiatives would start taking -- would start paying you out, what kind of growth would one see in that 2-, 3-year period, from '21 to '23 or '21 to '24? Or what's your wish list? And what kind of margins could you see once your investments starts paying off ? What kind of margin would you like to see in the front?

Sure. So look, first of all, I would say that we would -- pandemic has disrupted the plans. But at some point in this year, we do plan to do an Investor Day and present detailed strategy and sort of long-term outlook to all of you. We were planning to initially do it in midyear, but now obviously the schedule a little bit off the locker. If I could answer broadly, my -- our goal has been to make sure that our long-term growth rates start to come to these top quartile of the BPM industry. And that to my head, it's kind of more closer to sort of low double digits and on a sustained basis. That's the long-term sort of aspiration, but we'll kind of come to the details as we sit down and kind of talk to you about the long-term strategy. Margins, I think from 11% operating margins, I would expect that we'll make long-term, we'll make some gains of 1 to 2 percentage points. But I also want to make sure that we continue to invest. The world is changing. I want to make sure we're investing in the right leaders and right tools to kind of sustain that growth rate. But that's kind of the comment that I can share with at this stage, given it's still sort of early days into FY '21 and it's a very unique year.

So sir, is it fair to assume that your growth rates would have been much higher had it not been for COVID? I mean, you're still doing industry leading growth, at least compared to most of the Indian companies. And I just wanted to get a color. Had COVID not happened, do you think your growth rate would have been much higher? And when do you think some of these initiatives and investments in new people you've hired will start paying you off? Is it like next 6 months you can see some benefits over there or it's like next 2 years or next 1 year? When will the entire machinery, the entire new management you have and the strategy would start showing some benefits, if not full?

Well, if I may submit to you, I think we're already starting to see the benefits, right? The growth rates that we've seen in BFS are the results of carefully-focused investments. Some of it was already on when I came in and some that have accelerated since I have come in, and brought in more sharper focus and more investments into our sales and solutions engines. I mean take Mortgage, for an example. Between last year and now, we've added sort of about 5 or 6 very strong sales and account leaders, right, to continue to fuel that sort of engine out there. So I would submit to you that the impact has already started to come in. Obviously, different industries are at different stages of competitive sort of room, right? In some cases, we had a fast track truck because of sort of strong positioning. Others, we are kind of building up that engine. So these will kind of play out, I think, in an overlapping sense, right? BFS is kind of already started. Healthcare is starting to move. And then CMT will sort of follow. With Diverse, sort of kind of it's still very early days. So I would say that it will be sort of overlapping results. It's not like a start and stop, right? We'll start to see the results by this stage. What was your first question before this?

Had it not been for COVID, would you have seen a much higher growth because you're anyways living in a very significantly good numbers this year? So has it impacted you in a significant way? And would the numbers would have looked much better in 2021 had it been not for COVID?

Well, so much conjecture, right, at this stage. But one could argue, I mean, given the commentary we have shared with you, that in Healthcare and CMT, where we saw Q1 volume compressions, had it not been there, we would have sort of slightly better positions in those industries and the impact on the overall results. But it's just too much macro uncertainty for me to contextualize how the normal may have versus now it's playing out.

Sir, my last question, considering your largest client has been growing, at what stage do you think we can model in the existing numbers to stay? So since your large client grows, your overall growth rate gets impacted. But at some point of time, would you think that this client would reach the stability? And when do you expect that would happen? That at least the degrowth part -- the contraction part would be over and then the negatives of reduction in growth from the largest clients would stop impacting us. It may not lead to growth, at least the negative parts would get impacted and that could pull up the overall company's growth rate.

So I will give you 2 comments, and Dinesh, please feel free to add on this one. First of all, I think as our other businesses have picked up, whether it's in Mortgage or in Healthcare, we are starting to see a much better client concentration, right, a more evenly distributed client concentration because other businesses are starting to kick off. Our largest client, we have very healthy relationship. We are their largest customer. Obviously, there was one sort of portfolio rationalization, which was done in Q4 -- Q1 of last year, right, which we have talked about in the past couple of quarters. Beyond that, there hasn't been any significant change in the strategy, right? The minor adjustments here and there, and obviously now the Q1 impact. But otherwise, we are tied with them in the hip. As their business kind of operates at a steady clip, we kind of continue to grow or do some minor adjustments with them. So I think we are at a stable phase. If we get out of the COVID phase, we will be at a COVID thing. There aren't any exceptional events accepted that we expect either up or down. But it's a very healthy, stable relationship. As they evolve, the quality of our service and how we serve is evolving within that. Number wise, I think we expect by Q4, as Dinesh said, we should start to hit our pre-COVID levels by Q4, and other businesses are picking up sort of really nicely to kind of have a better risk profile from a client contribution standpoint.

If I understood you correctly, we should model in your last year Q4 numbers as the base case for this client, so that would be a steady set for this client?

[indiscernible] Yes, that's the number.

I'm sorry, I missed that.

No. I think that what you have said is right. The Q4 run rate is the number which you can back in for your other modeling purposes.

So you would expect some growth going forward from the low Q1 levels in this time, right?

Yes. As we indicated, the Q1 has the COVID impact. So I think that's getting normalizing between Q2 and Q3. So Q4 will be back to the Q4 last year, which is pre-COVID number -- level.

The next question is from the line of Dipesh Mehta from SBICAP Securities.

A couple of questions. First about the revenue growth guidance, which you've suggested about 6% to 10%. Now considering we have last year -- on last 3 quarters, we are fairly strong and now we are guiding around 6% to 10%, where we have done less than 2% as in quarter 1. If you can help us understand what drives this significant growth trajectory in next 3 quarters? And if you can help us provide [indiscernible]. Second question, maybe to some extent related about Mortgage business. If you can provide where -- what would be the run rate mortgage we have achieved? And how you expect that to play out? And if you can provide the business mix and colors around it? Then I have a follow-up, if you can answer this first.

Sure. So your first question is, what is the revenue build out from this point onwards for the next 3 quarters?

Yes. What gives us confidence because we have fairly high base in next 3 quarters?

Yes. So I think confidence comes from sort of 2 or 3 factors. One, our Healthcare Provider business, which saw revenue volumes shrunk up. In July-July, we started to see the volumes start to come back up, right, so we'll kind of recover on there. Our CMT business, obviously, we talked about, had a reasonable decline. Again, that volume is starting to come up. And barring any unforeseen sort of severe shutdowns in any of the geography, I think that will sort of continue to build. This is on our existing business. Our Banking and Financial Services businesses, both Mortgage, Collection and the U.K. Retail and Commercial Banking, all 3 are on a reasonably well sort of growth trajectory. I mentioned that the interest rate is low, the high mortgage rates for new home sales. They're driving continuing demand for our Mortgage business, both in origination. And now because we're entering into this very unique time where interest rates are low, and we'll start to see before those increase, right, as the impact of stimulus starts teether out, you'll start to see defaults sort of come through, which will create opportunity for both Default Servicing as well as our Collections business. So it's kind of -- it has those macro tailwinds, which gives us the confidence that this sector will continue to grow from the level that it achieved in Q1. Dinesh, anything else to add on this particular comment?

No, I think, Vipul you rightly covered.

Vipul, my question was more about -- because the factor which you said is largely sequential improvement kind of -- let's say, CMT is largely where we are seeing significant headwind in sequential terms. Q1 was very weak. But if I look last year Q2, last year Q1, CMT was doing reasonably okay. Now when you guide for full year, you are guiding from Y-o-Y base perspective, right, 6% to 10%? Now CMT unlikely to provide you any lever from Y-o-Y perspective, likely to remain weak. Even Healthcare unlikely to provide you significant growth keeper. Large part of the growth coming from BFS and in my opinion, largely might be from Mortgage. So if you can provide that perspective, because Q-o-Q, I understand, there would be significant improvement in which you're likely to weakness, and that's why you guide 6% to 10%. So if you can provide some perspective there.

Okay. Sure. So look, right, your comment on CMT from an year-on-year perspective, I think it's balanced. Healthcare, we'll see some uptick. As I mentioned, we see good traction in Payer. So whilst Provider will recover, but we see good traction in Payer. So it will be a decent sort of uptick year-on-year basis on the Payer part of our business. On BFSI, Mortgage, we did about $36 million in Q1 of '21. And we expect this will continue to increase Q-on-Q. And if you look at our run rate from the prior 2 quarters, this was a healthy sort of 20-some percentage increase on the last 2 quarters' numbers of '20 as far as Mortgage is concerned. Similarly, our Europe BFS business, between Q4 and Q1, it had a healthy sort of 7% increase of that as well. So that gives you a sense of how this will play out on a year-on-year basis relative to not just Q1, but also from Q4 of last year.

Yes, understand, sir. In Mortgage -- yes, sorry. In mortgage, let's say now we have said around $36 million what we achieved in Q1 from a revenue perspective. How generally get translated in terms of your margin? Because now we are not reporting it from a segment perspective, but we are seeing significant expression in your margin profile with origination growth and overall growth. So if you can provide some perspective now, let's say, Q1, $36 million, and you expect it to further grow? And when we will feel there would be some risk because then you have to maintain in FY '22, FY '23 this high base? And when origination might be likely to taper off? So if you can provide thought around it?

Yes. Sure. No, it's a fair question, something we think about all the time. As far as origination, which is linked to interest rates, our sense is that the current record low interest rate environment, this will continue for at least sort of 3 to 4 quarters, right? And who knows maybe till the end of next year -- end of next calendar year, right, from U.S. perspective, just given where the macroeconomic conditions are. Also keep in mind, which I sort of continuously talk about and very focused on internally, is that we try to keep our balance between origination and servicing, right? And that mix has been sort of 60-50, 60% origination, 40% servicing. And even with the expanded base, we are keeping it up to it. And more so, as I made the comment about default servicing, default servicing will come into play over the next couple of quarters, right? You've seen sort of how the U.S. banks have reported results. They've taken the provisions for losses -- credit losses across their financial products, whether it's cards, mortgages, auto, et cetera, et cetera. We don't play in all of them. But as that phenomenon plays out, if I may, last time when we had the global financial crisis, the whole default cycle for the U.S. home market took about 4 years to work through. But it's a very structured process of what happened in those case, right, at an individual property level. And that everybody is expecting. Everybody is sort of starting to prepare for it. But we haven't seen the actual volumes come through yet, will start to come. So that will act as a reasonable foil to when the winds kind of go out of the sail on the origination side of it. So yes, whenever that happens, we will have some risk, but I think we'll have a much bigger cushion this time to kind of deal with it when that transition happens. Does that answer your question on that front?

Yes. On profitability, if you can address how Mortgage revenue acceleration is also supporting overall profitability as well as that segment profitability?

Yes. I think most of our BFS portfolio is healthy margins, whether it's Mortgage or Collections or even the U.K., retail and commercial portfolio. Obviously, as our scale is increasing, we're getting more operating leverage out of our SGA investments. So it's kind of, as you would have seen, this quarter the BFS margins were about 18-odd-some percent, right, which was an improvement on the prior quarter, largely driven by scale and the fact that now we are -- our engine is optimized for scale up, right? We are able to scale better rather than the earlier investment, which was going into the hiring and training part of it. Dinesh, anything else to add on the margins for BFS?

Yes. I think BFS, the other thing, especially on Mortgage, as the -- it also has a big offshoring piece into it. And that's the reason the margin profile is slightly better in compared to other because in case of Healthcare, the lot growth comes on the onshore, which will be slightly lower than the offshore margin profile. So also that's one of the data points, within the Mortgage, that the offshoring is -- has a play in that one, and that's going to be as a differential margin or a higher-margin profile.

Understood. Last 2, and then I'm through. What would be the concentration? Earlier, we have -- one large client in Mortgage used to contribute significant portion of revenue. If you can provide now, considering we are seeing significant uptick in -- on a couple of clients, logo addition over the last few quarters? So what would be the concentration there in Mortgage? And the another question I have is about the technology segment, in part of CMT. What M&A role will play for you to build that presence there?

Sure. Ankur do you have handy the number of concentration within mortgage?

Yes, Vipul. So Dipesh, on the largest customer, we continue to maintain less than 40% concentration within the business segment. All the new customer growth that we are actually getting through is helping drive the growth across both origination and servicing. So at sort of overall level, there is no concentration risk necessarily that is driving -- it's not a one client-driven growth that we are seeing. It's a more secular growth.

Dipesh, on your M&A question, whether for technology or broadly, I think it's absolutely a viable strategy to get a set of capabilities or a set of client access to get rolling. My approach to M&A is to do it systematically, do it continuously, sort of build the network and reach into the market, so you have access to sort of what's coming up. You have a list of things that you like that you want to proactively go after. And that's the process that we have been sort of steadily developing and sort of building elements of visibility into the markets. Nothing specific to report to this at this stage, except acknowledging that it's a viable strategy. It's in our radar, and we continue to kind of develop our visibility into the possible option.

We take the last question from the line of [ Shivam Bhatt ] from [ ICIC Securities ].

Yes. I just wanted 1 clarification. This 6% to 10% growth is in dollar terms that you are expecting or in rupee terms you are expecting?

This is on constant currency basis, if I answered it -- if I answered your question right.

So you are expecting a 10% growth -- 6% to 10% growth on $578 million?

Yes.

Okay. And sorry, but I missed out on the categorization that you have given, the new verticals that you have said, my call got cut off. So if you could help me, what is in the collection? I mean like earlier you had to classify the collection and customer care. So what would be in the collection part and would be in the customer care part?

Sorry, your voice was a little echoic. You said, what's the breakdown between DECC, between customer care and collections?

Yes. Yes. So you have given the new vertical, digital and platforms. In that, how much would be collection and how much would be customer care in each of the segments?

So of the 48% of our total revenue, which were classified as DECC, about 36% is customer care and accounts for sales and 12% is collection.

Okay. And there is nothing in that intelligent back office, that is entirely customer care, right?

Sorry, ask your question again, please?

The intelligent back office, that is entirely customer care, right?

The back office is...

Sorry, you have classified 3 way, right? One is digital acceleration, second is customer intelligence and the third is your platforms. So wanted that...

We have said 3. We've said digital is our contact centers, or DECC, we have back office -- intelligent back office, and then we have automation and platform. So this is our 3 segments.

Right. So in that...

Yes, go ahead, please.

So in that, that intelligent back office is completely customer care, right?

No, intelligent back office is all back office. All customer care is in DECC, which is the digitally empowered contact center, right? That's where the contact center is. This is all transactions that we do.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for their closing remarks. Over to you, sir.

Great. Well, thank you, everyone, for joining. It's been a decent quarter. Good to have you all around with us over the last several quarters. And I look forward to talking to you in the next quarter. Thank you again for joining us.

Thank you very much. On behalf of Firstsource Solutions Limited, this concludes this conference. Thank you all for joining. You may now disconnect your lines.