Firstsource Solutions Limited (FSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Maheshwari. Thank you, and over to you.

Thank you, Stanford. Welcome, everyone, and thank you for joining us for the quarter ended June 30, 2021, earnings call for Firstsource. To take us through the results and to answer your queries, we have with us today Vipul Khanna, our MD and CEO; and Dinesh Jain, our CFO. We will be starting this call with a brief presentation about an overview of the company's performance followed by Q&A. 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 outlook, are forward-looking, and as such, are subject to known and unknown risks. These uncertainties and the risks are included, but not limited to what we have mentioned in our prospectus filed with SEBI and subsequent earnings reports that are available on our website. With that, I now turn the call over to Vipul Khanna to begin the proceedings.

Thanks, Ankur. Good morning, good evening, everyone. Thank you for joining us today. I hope everyone and your loved ones are keeping good health. Let me begin by first acknowledging Firstsource leaders across the board in stepping up to provide 360-degree support to employees and their families impacted by the second COVID wave in India, and my heartfelt gratitude to all Firstsourcers in serving our clients and their customers with poise and commitment despite the dire circumstances. This wave appears to be receding, and we hope that the worst is behind us. Since May, we have been conducting frequent vaccination drives and encouraging our employees and their families to get vaccinated at the earliest to strengthen our fight against COVID. Till date, more than 5,000 employees have been vaccinated in these drives. Turning to our Q1 results. We had another quarter of solid performance in quarter 1 FY '22. Revenues grew 38.5% year-on-year in constant currency and came in at INR 14,848 million or $201.3 million. Operating margins were 12.1% and EPS grew 50.4% year-on-year. I'm pleased with our Q1 results. We are on track to achieve our full year target, further validating our longer-term growth framework. Last quarter, we laid out in detail our growth framework to create a portfolio of businesses to drive sustainable growth and market leadership. In summary, the key components of this framework are: one, to maintain a sharp focus on specific segments in our 3 core industries of Banking & Financial Services, Healthcare and Comm, Media & Tech; second, to modernize our offerings, particularly investing in our Digital First, Digital Now approach; and third, to build a purpose-led, scalable and agile organization. Let me now walk you through the Q1 performance and the key highlights in each of our industry segments. Our Banking & Financial Services segment continues to perform well, delivering solid growth of 41.5% year-on-year and 41% in constant currencies. The interest levels in the U.S. are still finding their new equilibrium after last year's record lows. The home purchase mortgage market continues to be strong. However, as we expected, the refinance volumes in the mortgage business started to taper and some of our clients began realigning their refinance capacities accordingly. That said, we are performing very well across our servicing and digital segments and continue to acquire new clients. We added 4 new clients this quarter for the Mortgage business. We remain confident of achieving year-on-year growth in our Mortgage business. In Collections, recovery of the credit card segment has been slow due to macro factors. The charge-offs and delinquency rates are at record low from higher consumer savings and the government stimulus programs. However, recent macro data point to increasing economic activity leading to a revival of consumer spending and, in turn, a likely gradual increase in delinquencies and charge-offs. We, therefore, expect an improvement in our collections volume as the year progresses. We are executing strongly on our plans of diversifying this business beyond card receivables by using digital collection platform as the anchor. In this quarter, we added 5 new clients across fintech and utilities on this platform. We also continue our efforts to build a collections business in the U.K., and I'm encouraged with the buildup of the pipeline there. We continue our efforts -- shifting to our U.K. BFS business. This business continues to grow solidly driven by volume growth and expansion into new lines of businesses with our existing customers. The pipeline is quite robust, and we expect the momentum to continue through the year. The Healthcare segment grew by 25.2% year-on-year and 28% in constant currency this quarter. The growth momentum is strong as we are beginning to see a wider acceptance of our platform-based solutions and our increased participation in large transformational deals. In this quarter, we added 5 new clients in Healthcare. And our health plans and Healthcare business recorded its highest-to-date ACV event in its history from new and existing clients. This is an excellent example of our growth framework playing out as the end result. So as you know, last year, we split the Healthcare segment into 2: Providers and Health Plan and Health Services, or HPHS, to drive sharper focus in these 2 different markets. We invested in new leadership for HPHS, revamped the sales and account management engine and bolstered the operations and solutions leadership for this business. Our new sales and account management team developed a go-to-market plan and systematically worked at targeting new clients and expanding into existing relationships. Fast-forward to today, we are now working with 6 of the top 10 health plans in the U.S. We focused on our strength and retooled our solutions to make them more agile, cloud-ready, incorporating product competence from industry-leading platforms. Our Digital Intake platform is now amongst the best in the industry, and we are making solid progress in the emerging telehealth and remote patient monitoring market. These efforts are beginning to bear fruit. I'm very pleased to see the momentum that we are generating for this vertical. We have now similarly expanded the leadership team for the Provider business. Last month, we welcomed Lauralea Tanner to lead the market function for Provider business. She will be responsible for sales, solution and partnerships and work alongside the existing team to build and execute on the Provider growth strategy. The Provider business is also poised to grow well this year, although the timing of volume recovery is somewhat fickle. With the rise in Delta variant cases in the U.S., last week the U.S. government further extended the public health emergency till the end of October 21. Notwithstanding, we are seeing distinct movement in the pipeline with prospects restarting conversations put on hold from COVID and a good RFP flow from the other systems and bodes well for our Provider business. Our Communications, Media & Tech segment performed solidly. In Q1 '22, this segment grew by 70.1% year-on-year and 56.8% in constant currency, although coming off a low base in Q1 of FY '21. While the second COVID wave in India had a transitionary impact, especially on this business, the impact has now subsided. Our key client relationships are in good health, and we continue to execute well. Sales momentum is picking up. We added 2 new clients in this quarter and continued to strengthen our pipeline. For our go-to-market forays into newer segments of CMT, we are piloting new solutions, partnering with exciting product companies to help our clients transition to digital. For instance, we are in the process of architecting the operating model for a digital new start-up that truly disrupts the news value chain. We believe this will be the template for more organizations to follow both traditional and new age. Shifting to another topic. In the last quarter, we updated you on our 2018 strategic partnership agreement with our largest customer group in Mortgages. To refresh everyone's memory, under this agreement, based on the revenue realized by Firstsource, they could accrue options of up to 15% in our Mortgage business entity. This relationship has served us very well, and after a strong FY '21, the customer group had requested an early partial monetization of their options in the Mortgage business. We have now successfully completed negotiations with this customer group, and we are pleased that -- we are pleased with where we've landed. The customer group has agreed to extend the engagement beyond FY '22 and continue our preferred partner status. We have bought back their options in our Mortgage business for a guaranteed consideration of $23 million on a deferred payment basis and a contingent consideration of $11.25 million linked to future revenues. During FY '22, the cash flow impact will be $12 million, which we paid now. The remaining amount will be paid as $3.5 million in FY '23, up to $12 million in FY '24 and up to $6.75 million in FY '25. The buyback of their stake will be accounted in shareholders' equity in Q2 net of the auction cost already considered. So in effect, this will have no further impact on our P&L going forward. Again, we are pleased with this win-win agreement with a key client and a clearly defined outcome for our financials. Finally, coming to the FY '22 outlook. We are pleased with our Q1 results and confident in our full year outlook. As such, we are maintaining our revenue growth guidance of 15% to 18% in constant currency, and the operating margin range of 11.8% to 12.3%. With this, I now pass it to Dinesh to cover the financial details.

Thank you, Vipul. Here is a quick summary of Q1 FY '22 financial performance. Revenues came in at INR 14,848 million or $201.3 million. This implies a year-on-year growth of 39.8% in rupee terms and 38.5% growth in constant currency. On a margin front, operating margin or EBIT came in at INR 1,800 million or 12.1% of revenue for the quarter, which is 53.9% growth year-on-year and implies a margin expansion of 111 bps. Profit after tax came in at INR 1,345 million or 9.1% of revenue for Q1 FY '22. This is a 51.7% growth year-on-year with a margin expansion of healthy 71 bps. In Q1 FY '22, we generated INR 244 million cash from operations and our FCF was INR 141 million. After adjusting for CapEx of INR 123 million, our closing cash balance as of June was approximately INR 2,159 million. Our DSO came in at 56 days in Q1 versus 52 days last quarter. In this quarter, we saw an increase in our working capital requirement due to the annual bonus payouts, adjustment of the advance from customer and increase in some of the DSOs. We expect this to normalize in the future. Net debt as of June '21 stand at INR 4,044 million or $54.8 million versus the INR 5,531 million or $73.2 million as of June 2020. We added 4 new centers globally, increasing our right of asset use and asset liability, which is in the balance sheet due to the new center got capitalized, resulting into also the high depreciation and interest costs. The interest cost increase, which you guys are looking, is mainly on account of those not on the working capital increases anywhere. Tax rate for the Q1 was around 19%. For FY '22, we expect it to be within the range of 17% to 19% for the year. On our ForEx hedging, we have coverage of GBP 55.3 million for the next 2 years with the rate ranging from INR 107 to INR 116 per pound, while the dollar coverage is at $103 million with an average rate of around INR 76 to INR 82 to the dollar. With this, we can open for -- the call for questions.

[Operator Instructions] The first question is from the line of Sonaal Kohli from Bowhead.

Firstly, I wanted to understand how was the movement of your Mortgage business in Q1 as compared to Q4? Secondly, going forward, do you expect a trajectory to fall further considering if the interest rates remain here? When you came with your guidance in the last quarter, the interest rates were materially higher than what they are today. So do you expect that the -- assuming the interest rates are constant, is it a fair assumption that there could be an upside to your estimates if interest rates remain here?

Yes. Sonaal, thank you for your questions. So look, Q4 last year or Q4 FY '21 was a very strong and big quarter for the Mortgage business, right?. As we laid out our guidance and then started the year, we had modeled that there will be a fair amount of moderation in the growth rate compared to what we saw last year in the Mortgage business, especially for the refi volumes. So the purchase volumes remained strong, right? That market is growing. The last estimate was that the purchase finance market is growing at about or expected to grow this year, calendar year, about 16%. The refi market, we had forecasted, and as forecasted, they started to taper down. So to your question, yes, the interest rates end of last year, the 10-year treasuries were 0.9%. At some stage, we saw the forecast that they will go up to about 2% by end of the year. But after peaking at about 1.75% early in the year, they have kind of come back down to 1.27%. So it's kind of a little bit dynamic. Our clients are also watching how the volumes play out. At this stage, we expect that we've seen some amount of calibration in June. You'll see the full year impact of that in Q2. But given where we are, given the sense of the servicing business and sort of the broad relationships we have, we had guided to at least a low double-digit growth in the Mortgage business, and we think we'll kind of hit that. Beyond that, it's kind of a little bit variable. We'll have more updates to you as sort of months progress and we see sort of more settling down of the market.

But not from your guidance perspective because, obviously, this is a dynamic situation, but assuming interest rates remain here, hypothetical question -- or for a hypothetical answer, is it fair to assume that you'll upside -- there could be an upside in the volumes and there will be much more people willing to refinance than at 1.7%, Wouldn't that be obvious? What am I missing?

Directionally, it is reasonable. Directionally, it's reasonable that if interest rates come back down again. I don't know if you noticed there's another variable we've seen. 2 weeks ago, the Fed Housing Financial Agency, which oversees Freddie Mae (sic) [ Freddie Mac ] and Fannie Mae, they had imposed a 0.5% adverse market fee at the start of the pandemic, almost like a risk premium for the market set of uncertainty. Now beginning sort of July or somewhere in July, they ended at 0.5% fee saying that the market conditions have stabilized. And that, in effect, means that there is a little bit of a reduction in the cost of refinance now. So that versus -- and that plus sort of recent coming down of the interest rate market directionally, it should mean that either we don't see as much a fall or we start to see some of the solidification of the market as the quarters go by. So, yes, directionally, there should be upside if these 2 factors play out favorably.

Sir, secondly, my second question related to your Healthcare business. Would it be fair to assume that you will achieve your full normalization in the June or the September quarter or you had achieved that already in the March quarter as far as your Healthcare business was concerned? Or considering the lead-lag relationship between when the patients get admitted versus when you bill your clients, there would be some gap, which is that quarter where you would assume that -- I'm not talking about communal benefits, but from an overall market perspective, your revenues would stop having a positive impact of the Healthcare. So they'll achieve a new level of normalcy. What do you assume would that be December, September or which quarter would that be?

Sonaal, your question is normalization from a standpoint of volumes for our hospital clients starting to come back to normal to almost pre-pandemic levels. Is that the answer you're looking for?

Yes.

Okay. So to look -- I think the markets are coming back, although sometimes it becomes fickle in certain geographies depending on sort of how Delta variant is playing out. But you're right in the sense there is a cycle time to patients coming to hospitals, right, and the whole cycle of billing, finding coverage, et cetera, et cetera, we filing cases, getting approval and stuff like that. So there is a lag cycle to that. I don't think I can say at this time that we peak or we will normalize by September something because the volumes are still building up. And the extra variable of this public health emergency means that some of the states kind of delay the approval cases because they are operating under the public health emergency sort of regime of sorts. So there is an extra nuance of sort of how different states play out in terms of approval cycle. But keep in mind, all this that you and I have been talking about is relating to our Provider business, right, and for the eligibility part of that business. There is a whole receivables management part of that business within Providers and then the whole Healthcare HPHS business, which has somewhat impact from claim volumes, right, depending on hospital visits and how many claims come to our clients. But all the effort that we put in last year is about new clients and new types of work, which are somewhat unrelated to sort of the macro conditions in the market. These are new wins, fair shares and we expect that we will continue to grow up strongly as the year goes by.

Sir, what I was trying to ask you was that -- so the normalization of revenues -- is it fair to assume that the normalization of revenues would lead to much higher revenues in Healthcare than what we reported in the June quarter? That is what I was trying to assess, whenever that normalization happens.

Sure. Sure. So -- and again, I was trying to break it for you that I hope you appreciate the fact that it's broken into 2 parts. HPHS does not have a correlation to a normalization as much, right? So that's the first part, normalization of volumes or footfall into the hospitals. As far as Provider is concerned, I think if the current trends of opening continue and there isn't a significant impact from the Delta variant, we expect greater traction sort of starting to come through or we starting to hit to where we'd like to based on existing client portfolio by the December quarter.

[Operator Instructions] The next question is from the line of Mohit Jain from Anand Rathi.

Can you hear me, sir?

Yes, we can.

Okay. So 2 questions on the Healthcare side. It is a follow-up to the previous one that you were explaining. In terms of growth outlook for '22, now that you have some clarity emerging on public health emergency as well, what kind of growth rates are you expecting there in Payer and Provider? That is one. And the second follow-up to that is, as Mortgage tapers off and Healthcare picks up sometime in FY '22 second half, what impact would it have on margins? Like would Healthcare come at a relatively better margin or would it come at a lower margin than the Mortgage business?

Okay. Mohit, great questions. Healthcare growth rates, as I kind of detailed out the HPHS story, they had a great quarter in terms of annual book -- ACV sales for Q1. And as we start to execute, we'll see a good set of revenue bump up from those wins as well as what we have in our run rate, and our pipeline is strong there as well. So I expect strong growth rates from HPHS. Provider business, it is somewhat dependent on macro factors, but we still believe it will be a strong year. We are executing well on the PatientMatters integration and we're starting to see the benefit of cross-sell and the combined offerings coming together to play either in terms of increased geography coverage or scope coverage for our clients. So between the 2 combined, we expect Healthcare will be a strong growth rate from this point onwards. Margins, margins is kind of an interesting question, and obviously, we are calibrating sort of different economic cycles for -- which impacts the businesses differently. And that's the whole advantage of having a portfolio business. The blended margin should be in line with the company average across those businesses, right? There is a cycle time to our HPHS business implementation. But at the same time, we have very healthy margins in our Provider business. So it kind of balances it out relative to what we could see some calibration in the Mortgage business and hence its margins.

The next question is from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First about the top client, can you help us understand how you see top client is doing? I think in this quarter, we have some impact because of second wave of COVID. But going forward for the year, how you expect it to play out? Do you expect Q4 kind of run rate to continue or you expect some moderation? Second question is about Healthcare. Can you give some breakup about Payer, Provider, how they fared this quarter? Third thing is about a Mortgage business and Sourcepoint-related agreement which we have signed with the client. I miss out the case outgo number what you said, so can you say that number? And Dinesh, if you can help us understand how P&L will be impacted. It is only interest cost related thing because of case outgo or any other changes you expect on P&L and balance sheet?

Okay. So I'll try to answer and if I miss parts of it, please, please remind me. So for the top client, Q4 was a very strong quarter. And as Q1, we've seen some supply side constraints, especially in India, given what we saw in April and May. So there was some compression from a supply capacity. But also, there was a little bit of softness in demand from the client because they had a big run-up, a lot of campaigns and stuff like that which they ran in the March quarter. And kind of there was a little bit of a breather in the June quarter. As we go forward, I think purely from a relationship standpoint, very healthy. We continue to see small opportunities for growth, strength and change, et cetera, in different campaigns. So all that's going fine. My sense is that as the summer is kind of bearing out in Europe and people are outdoors, et cetera, et cetera, we'll see a little bit of demand -- continued demand softness in Q2. But traditionally, the December quarter is strong there, right, because of the holiday season and stuff like that. And we expect to play a big part in their continued plans for that. So to that extent, I think it will be a strong year on a full year basis. Barring some of these sort of early challenges we saw in Q1, I expect this to be a strong year for the rest of the year for the top client. Let me take the Mortgage question quickly. So your question [Audio Gap] right? The cash outflow is expected. And you wanted me to repeat the numbers, yes?

That's right.

Okay. So FY '22, the current financial year, the cash flow impact is $12 million, which we recently paid. In FY '23, it will be $3.5 million. In FY '24, it will be up to $12 million because, remember, it's linked to revenue. So it may be up to 11 -- up to $12 million in FY '24. And up to $6.75 million in FY '25, okay? The P&L impact, whatever had to be done is now done, is. We expect no more further P&L impact because we bought back the options, and this will be now accounted in the shareholders' equity in the balance sheet from this point onwards. Dinesh, anything to add from a P&L impact?

No. I think the other question was the interest cost. So I think he's right because whatever the amount which we need to pay that will come with some interest costs. So I think -- again, I think we have current working capital lines and...

Dinesh, you there?

Yes, I'm there. Are you able to hear me?

We lost you after the credit lines.

Okay. No, I'm saying interest cost is not going to be material because, again, the payments are in next 3 years and we'll have sufficient cash we will generate to pay off these liabilities. So I don't think there will be big interest cost on this.

Understood. And the Payer and Provider, if you can give breakup.

Okay. So when we -- this year because of -- this quarter, HPHS had a strong growth. And at this point in time, the breakup between our 2 Healthcare businesses is -- for this quarter is close to -- let me just look it up closely to make sure I give you the right numbers, it's closer to like 44-56 now. 44 HPHS and 56 Provider.

The next question is from the line of Manik Taneja from JM Financial.

Vipul, I had a couple of questions. Number one thing is that while the on-site/offshore mix is not such a big metric for you or as much as it is for IT services. But is the increase in on-site mix [indiscernible] this quarter linked to the Healthcare ramp-up? That's question number one. And the second question, once again, relates to the Healthcare vertical. We're seeing renewed focus from one of your Tier 1 IT services player on their healthcare business. Do you see that as some sort of a challenge for you in the BPM case?

Okay. So on the first question, I think your interpretation is right. The slight movement we've seen for onshore this quarter is primarily driven by the growth of our Healthcare business. Last 2 quarters, we have seen strong Mortgage growth, which had a pretty solid offshore component. So that was kind of taken. Now it's kind of come back a little bit this way. The second question you said is, you said Tier 1 IT companies focused on health care and is that a challenge for us?

Yes. Yes. Given their platform case and the renewed focus on the Healthcare business [indiscernible]

Sure. So first, look, as a generic comment, the Healthcare, especially the Payer segment, right, or HPHS, is one of the older verticals or the deeply penetrated verticals for the Indian IT and BPO segment, right? All of the key players have sort of forays and decent portfolios into this. The second comment is that as the Healthcare segment comes through sort of the challenges its facing and its strategic direction for its operating models, digital and platform is becoming increasingly one of the substantive conversational topics between us and our clients and across the industries, right? The clients have appetite. There are models emerging. There are reasonable players in the software and there are reasonable players who are integrating it. So it's good to have good competition. It kind of opens up the clients to possibilities and it's kind of makes adoption easier. So we welcome sort of more and more competition on platform-based services in HPHS. We are competing with sort of absolute Tier 1 players, and we are holding our own. We have some platforms. In other cases, we'll partner. And in some cases, we'll partner with best of breed as well. But the good thing is that the market is realizing the possibilities of buying a platform-based service, let's say, compared to 2 years ago. So that's very encouraging. And then obviously, we'll have to fight out fairly in the market and win on merits. But thus far, the results we've seen, given, as I mentioned, sort of the historically high win rates or one of the highest quarters of wins that we have in Q1, I'm confident that we'll have our fair share of wins in the market.

Sure. If I can ask just ask one more, just wanted to get your thoughts around the potential for increase offshoring with some of your U.K. BFS customers given the labor conditions -- or the labor conditions due to the Brexit in U.K.

Yes. So I'm not necessarily hearing a more Brexit-related labor issue. I think it's more the tactical operating model given pandemic. And two, given either pandemic or this endemic accelerating the digital to say what's the right operating model with digital and then where else should the human supplement part of the service be. So with that background, I think the conversations about using more offshore, whether it's Europe or Philippines or India, I think that has increased earlier -- from what we were seeing earlier. And clearly, as the banks find their new equilibrium post pandemic, right, and everybody has pressure from the fintechs as well, we are seeing greater appetite for transformational solutions, more appetite for takeovers of captives and op centers as well as moving to offshore. So directionally, I think there is appetite. But as the market opens up, we are seeing good RFP flow and substantive conversations. I expect some of those will play out in the next 2 quarters. And kind of we feel where we land on that.

[Operator Instructions] The next question is from the line of Sonaal Kohli from Bowhead.

I have 3 queries. Firstly, on the margin side, based on your guidance broadly, the EBIT margin target for this year is 12%. What are your long-term margin aspiration? And where do you see the numbers start going materially? Is it like very backdated, let's say, only 5 years from now you start seeing margin improvement or do you think the phase of investments would largely be over this year? And for next year, you could see 50, 75 basis points or whatever that number is improvement. Some idea on that side and how the trajectory would span out over the next 2, 3 to 5 years would be very helpful, at least in terms of your aspirations. And secondly, as far as this year is concerned, as far as absolute revenues are concerned, assuming the [Audio Gap] organic revenues, would the second half absolute revenues be bigger for you or first half revenues be bigger for you based on whatever you understand today? Lastly, what are your acquisitions planned this year? Are we expecting a couple of acquisitions over next couple of quarters? I think Mr. Goenka was on television and he mentioned about this. So these are my questions. If something is not clear please let me know and I'll reclarify the questions.

Sure. No, I think I got it. If I don't answer it, let me know. So Sonaal, on the margin, we've guided for 11.8% to 12.3%, which in itself is about a 50 basis point improvement from what we got broadly last year. And as I said, from a long-term aspiration standpoint, the way I see it, the way we've kind of building our business and the business model is that we expect through operational excellence, through operating leverage to gain small -- be that -- and again, I'm talking very broad aspirationally, 40, 50 basis points of improvement year-on-year from -- in the margins. We will get more -- slightly more than that through our operational excellence and operating leverage. But at the same time, we'll continue to invest. There's a lot we can do in the market. We see a lot of runways across our business and as well as new offerings, digital, et cetera. So right now, we have a reasonable load of SGA investment across the business, right? You've kind of kept pace with sort of a lot of market and sales leadership we added early on. And now we're coming to sort of the second and third year of investments. What I mean by that is, now we are bulking up our delivery engines, right, bringing new exciting talent in different parts of our business. So for this quarter, for instance, we welcomed a very senior person as Head of our Training and Skill Development. We got in a Global Head of Recruiting to kind of bring more broad method, more sort of depth to our recruiting strategies and using technologies. At the same time, for instance, we've also welcomed 2 deep tenured experts, one in Mortgage and one in Media Practice to be the practice heads, right, working with both sales and delivery teams to be deep domain guys practice heads. So that level of investment we continue to keep on doing. Obviously, my leadership level, we've kind of more or less done with sort of what we want at this stage. Now it's about expanding that. So between gaining from operational excellence and continuing to keep SGA investment and every now and then a strategic deal investment, my long-term aspiration is to continue to grow our margins by about 40 to 50 basis points annually. And you can do the math and we should be targeting to kind of get to closer to sort of the mid-teens levels in the time frame that you asked about. The second question about absolute revenue for H2. So look, I think the way we had modeled it for the 15% to 18% growth for this year, clearly, we had a moderation in Mortgage and makeup through higher growth in Healthcare to deliver the 15% to 18%. At our current run rate, if we just keep it without kind of a material movement, we end up at the lower end of our forecast. And if we kind of see uptick in the businesses that we are kind of currently pursuing, that should take us sort of to the upper end of the forecast. So I think that's kind of how we see the model at this stage, right, between the 15% to 18% with the variables in between determining where we land. And the last question on inorganic. As I said, right, we've defined our growth areas clearly. We've built up a pretty reasonable Corp Devs capability, which Ankur leads. We've built up our network or strengthened our network, and we're starting to see a lot of inbound interest. Obviously, we want to be disciplined. We want to be selective. And we know the areas where we want to go for. So that's a continual sort of journey now as a channel to watch for. And as soon as things develop, I'll obviously come back and update all of you.

And sir, one more question on the -- your revenue growth trajectory from a longer-term perspective. So while you've taken several initiatives, we also did benefit from tailwind in the Mortgage business though we had negative impact on our Healthcare business. And this year, we will see normalcy in Healthcare. But beyond 2022, I'm talking from a more 2-, 3-year perspective, beyond 2022, so let's say, '22, '25 or '24 trajectory, what is the aspiration in terms of growth rate? And I understand the sales cycle in this business are long. So is it fair to assume that at least from a next year perspective, some of the great work you guys are doing in terms of hiring people and making investments, we should see acceleration in benefits of that? Or am I wrong in my expectations? So firstly, from a '22, '24 or '25 [Audio Gap] with all these investments. And secondly, is my understanding correct, there's a lag between the efforts you put in as far as big business is concerned and that hasn't shown up. Some benefits have obviously accrued, but the larger benefits still have to accrue. So some perspective on that would really help us understand your long-term growth plans with all these investments.

Yes. So I think first of all, just the way I look at it, in the services business with continuously changing client preferences and business models, a level of investment, I think, is healthy to keep up rather than a bumpy sort of way to look at it. But I think -- I just want to make sure -- you appreciated that while I get your point about directionally the operating leverage from some of the heavier investments starting to come through. From the longer term, as I have said in the past, our aspiration is to deliver top quartile growth in the industry, which if you follow the current growth rates in the industry at this stage, that should be closer to sort of -- low to sort of mid-double-digit growth, right? That's our aspiration to deliver that consistently. Mortgage tailwinds helped last year, but we took the opportunity to build a lot of foundational work and we're starting to see that pay off in Healthcare now. We're starting to see that pay off in even Collections and the U.K. Banking business. And you'll see that even in Mortgage, the investments in digital products and servicing, we will see sort of that continuing through, right, regardless of where the interest cycles kind of go up and down. But we have a core foundation on which we can continue to expand our business. And within this, I see a lot of headroom for growth in adjacent areas of growth, right? We are still, I think, early in this cycle for these industries, especially health care. There's a lot we can do in health care. And then CMT, as I said in the past, we have a good portfolio in the U.K. We are in the early phase of building our go-to-market for CMT in North America. Very early days, very small revenues. But that's something which I expect that in next 2 years, it will start to kind of deliver results. And in the meantime, we'll continue to invest in newer areas, right, so that we have this rolling phase of growth coming in while existing portfolios and accounts go up. So that's how I kind of look at the business to be able to deliver consistent top quartile growth. Stanford, can you hear me?

Yes, we can, sir.

All right. There was quiet that I wasn't sure.

We'll take the next question from the line of Dipesh Mehta from Emkay Global.

2 questions just from broader medium-term perspective. Can you help us [indiscernible] some progress made on new age tech companies, right? I think that is the focus areas. How we are seeing their progress? And if you can help us how the size of deals and overall engagements is evolving in that space? Second question is on U.K. BFS. If you can provide some perspective how you expect U.K. BFS to play out? And any large deal opportunities in that market which you are foreseeing and likely to get materialized in next few quarters?

Dipesh, progress in new tech, clearly, every industry has its share of now new tech players or the new tech divisions of existing large players. From our progress standpoint, we made strong progress on the fintech segment. Obviously, digital collections is a lead horse for the people who are in the lending business. But we, at the same time, seeing decent traction on servicing and back office for the nonlending fintechs. The -- if you look at the payment side, the buy now, pay later segment, BNPL, which is emerging as a fast-growing segment for payments sort of innovation, with small deferrals, we made steady progress there. And now we are working with 3 of the top 5 BNPL players in that. That's as far as fintech is concerned. As far as health tech is concerned, whether it's large plans kind of embracing remote patient monitoring and those newer models or the providers kind of going there, telehealth, we are playing in that. We are currently partnering with 3 platform providers and we are out there in the market piloting different solutions. And I expect that segment will grow because we, as consumers, are shifting to remote health. And I think the business models as well as the operational models are emerging and we are playing right with that. So small deals, but more consultative, more evolutionary deals that we're seeing on the health tech side. And then especially on Media, as traditional media goes to digital media, right, whether it's publication or content and we're starting to look at even things like education tech, right, because we are consuming education also sort of remotely, and of course, there is streaming, shifting from cable to streaming. On those segments, we have a strong play. Obviously, streaming has been a strength for us, given our large client relationships, building on that as well as going into other traditional or new age media players kind of getting there. I shared the example of the new start-ups that we're talking about. So again, as the playbook has been for most of the industry, starting with the players when they're young because these guys grow fast. It's about evolving with them and growing with them. So at this stage, the deals are small. But in fintech, we're starting to see reasonably sized deals as they become sizable, not too far from some of the traditional deals that we've seen on the new tech. U.K. BFS, steady. We have a strong portfolio of leading banks. We are part of their evolution. We have a reasonable sort of pipeline of large transformational deals. These are long-cycle deals. We are playing strongly, some with partnership with IT partners as well. And yes, as the 2 or 3 quarters go by, we will see how those deals progress and come back and update you.

Just one follow-up on the first part. Do we plan to have any scalable business in content moderation or digital catalog side?

Sorry, content moderation and what's the second thing, Dipesh?

Digital catalog and other things like Amazon and Swiggy of the world.

Okay. So content moderation, we are evaluating. We haven't done any meaningful sort of forays into that market yet. As far as e-commerce is concerned, that's a priority area for us. We have opened a large e-commerce relationship, small relationships. We have laid out a pilot -- a couple of pilot engagements and we've kind of now scaled it up from a digital infrastructure for that. Rather than doing it through the traditional means, we have added a lot of analytics and data to that offering, and we are now showcasing that to the client and get sort of greater share of the wallet based on a new age solution to that. So e-commerce in Europe or U.K. as well as North America is focus, and we are focused as much on the merchant servicing part of e-commerce besides like traditional model of consumers, the demand side servicing or the consumer servicing part of it.

The next question is from the line of Sandip Khandelwal from Edelweiss.

My name is Sandip Agarwal, sorry to correct you. Yes. So Vipul, excellent set of numbers given the large base you have. I have 2 things to understand. There is a lot of confusion on the disruption and transformation which is happening on the digital front from the traditional front. So if you -- while you very nicely elaborated all the opportunities which you see in the mortgage market and other markets. But do you believe or agree that once the rates stabilize, that market can have some other business opportunities rather than the ones which you are seeing right now? That is number one. Number two, how you are looking at your manpower because you have probably hired the best of the best talent available in the market for running your digital piece and other pieces. Do you still see you need to hire a couple of more people to fill few of the gaps which are there in some of the geographies? Or you think you are done for the time being? And if yes, then what is your plan? What I'm really trying to understand is that you had every time been looking for adding additional revenue growth drivers. So which are the areas where you're looking? I know it is a strategic question and you may not want to disclose. But if you have anything if you can disclose publicly, it will be great help. And best of luck for the next quarter.

Yes. Sure. Thanks, Sandip. Your first question, when you say disruption from traditional to digital and once that is done -- I'm trying to follow the question. You're saying so where do you see the revenue models to emerge once that transition from traditional to digital is done?

Yes, yes, yes.

Okay. So look, fair question. I think different manifestations of it. One, the humans will always be there, right? The human need for decision-making, intuition, connecting the dots, right? All that judgment and decision making comes from humans. Technology helps in taking away the road work, the repetitive work, right? And technology helps to go deep and bring data and bring insights which humans can then articulate at some stage. So I think with that philosophy, and as you would have seen from others in the industry, the manifestation of that will be that there will be more, rather than run-only engagement, it will be designed run and continuously improve type of engagement. So the mix of run resources versus change and design resources versus technology, that interplay of factors of production into a deal value, I think that will change. And the consult in the change value will not just be upfront but will be through the deal cycle or the life cycle of sort of that engagement, right? So that will be one manifestation. Where you're signing up for a directional transformation, you're starting with a point of saying, I will use, A, B, C and tools and platforms and who knows, by third year, ML has improved to some level for that particular use case that you're able to use machine learning significantly, take down the human component, but there is a big chunk of ML deployment that could happen in that engagement. So that's one manifestation with the interplay between change design and run resources. The second manifestation obviously, what we talked at the early part of the call at Sonaal's question, I think, is about the platform based. The platform-based services, I think, where the entire stack comes together, right, infrastructure, application, operations and analytics, all stack comes together and you deliver an outcome to the client, I think that will become more prevalent. We're seeing that in Healthcare happening. We see that in parts of Mortgage cycle happening. And we are seeing little parts of the narrowly defined segments of health care providers also wanting that, right? And I think from BPO to BPaaS, the platform-based services will be the other big manifestation of that. And then third is what we've seen already play out with FAANG players and sort of the technology players is more where you are embedded as part of new product or new feature launch. And hence, you are evolving, right? You're starting with a point of view. And as products take off, the service model also evolves. So you are right there designing and then delivering to it. So as new functions and features of our clients go up, we become sort of the intrinsic operators of those functions behind the scenes. So those are the 3 manifestations that I see for the new revenue streams coming for our industry, right? And I'm sure with your coverage, you have a good sense of that as well. From a talent standpoint, digital talent is -- good digital talent is always welcome, right? We'll take them in both arms. Our key leadership positions are filled. And obviously, those key leaders continue to add people as we bring on new platforms and as we do new partnerships. So we recently announced 2 COEs with 2 industry-leading operational platform. These are small COEs, but those are investments, and we will need to bring in leaders who understand and who [indiscernible] those platforms so that we can deploy those tools for our client solutions. So some level of investment will continue, but our key leadership positions for digital, both in markets as well as in delivery are now kind of filled up.

And one last one -- thanks, Vipul, for that elaborate answer. One last question if Ankur allows me. So I wanted to also check with you that the FAANG companies, they are -- because the people are able to travel within the U.S. and most of the places, so they are posting robust numbers. But a large part of those products and services are basically just moving from one party to another, actually from the seller to the user, but not necessarily the users are able to use it or implement it. So how do you see -- once the vaccination issues gets over and the world opens up, how do you see your business moving forward? Will you see a big jump up immediately? And it doesn't mean that I'm saying that right now your business is stuck because of that. But what I'm trying to understand is that -- what my understanding of this huge revenue beat and profit beat which is happening in the FAANG because there's kind of a panic buying by the CTOs who just generally are looking to somehow not take the blame of shifting of market share from off-line player to online on them and they are doing panic buying. And probably the implementation still has not started because the talent which is required to implement such a huge volume is not still available. And they are just managing things somehow given the pandemic situation. So how do you see, when things open up, will there be a very huge pent-up demand or you think we will have some benefits? So how do you interpret it?

Sure. So I think there are 2 parts to this question, if I understood it right. One is we obviously are not an IT company, but clearly, as an industry sort of participant and an observer, I do see that IT talent, like other things, is in short supply because the shift to cloud is driving up huge demand. To that extent, you see a lot of revenue to the big cloud providers happening. But there is constraint in terms of experienced people who can help in the transition to cloud. We see that small manifestations of itself as we move our products to cloud and as we bring clients to our platform-based services. From a demand bumpiness linked specifically to the economies opening up, my sense is some sectors like BFS, Healthcare have been impacted less. I mean somewhat you could say that the elective procedures were not done. So some of the diagnostics, some of the preventative and some of the usual health procedures, there is a pent-up demand and then it will have its sort of downstream impact through the health care value chain. Obviously, discretionary spend like travel, consumer goods, they are seeing the pent-up demand coming through now, right? Now fortunately/unfortunately, we don't play in those discretionary spend verticals, so we are, to that extent, shielded. We saw some impact to the CMT vertical. But the other way to think about, as you've seen your behavior, my behavior, right, as consumers, a lot of our relationships with entertainment, content, education, travel has changed to some extent permanently, right? And I think some of it is not going to go away. Even when the novelty of the world is opened up, let me go and travel, let me go and visit, let me meet, I think once that is over, some things are not going to change. So to that extent, these are permanent. So I guess what I'm saying net-net is I think some of this -- the transition for digital is in early stage. I think it will play out for the next 2, 3 years. And then with the new model, let's see how the demand environment, does it kind of add as an exponential boost to the demand cycle from the new base and then we go on to the next cycle or we take a breather after that to the next cycle.

The next question is from the line of Shradha from Asian Market Securities.

Yes. Most of my questions have been answered. Just one of the questions. Given the supply...

Shradha, your voice is not very clear.

Can you hear me now? Hello?

Yes. May we request you to...

Yes.

Yes. Can you hear me now?

Yes.

Yes.

Yes. So Vipul, given the supply side constraints, do you see a possibility of another round of wage hike after what we gave in 4Q?

Shradha, not necessarily supply chain constraints. But in any case, we have budgeted for a wage cycle in this financial year, right, as we gave one in -- at the start of the year in January and we did budget for another one in this cycle -- sorry, in this year. So yes, we'll go through with that in the second half of the year, and we've budgeted for that in our results.

Okay. Okay. Okay. And secondly, how should we read about the growth rate in our top clients given that it was sort of soft quarter for the top clients and we expect a strong year for them despite having a tough start to the year. Should we see some material ramp-up in the second half of the year?

So Shradha, so -- look, we are their largest partner. The relationship is healthy. As they went through the down and then upcycle and then the expansion cycle, we played a key part in that and we are playing a key part as they're going through the cycle. So at this stage, as I answered to, I think, Dipesh earlier, right, Q4 -- our March quarter was very strong. Q1, we saw some element of catching up your breath from the demand side and there were obviously supply side constraints in India. We do expect the December quarter to be strong. It's traditionally a seasonally strong quarter for us. And we are looking to kind of broaden our engagement through digital now. That sort of -- COVID had kind of paused those conversations. Now with COVID sort of getting more somewhat to the side, I think it's time to kind of bring those conversations [indiscernible]. And that should add to more qualitative heft to the relationship to start with and then we see so what is the quantitative impact. But net-net, it should be a strong steady year for the top client.

The next question is from the line of Madhu Babu from Canara HSBC.

Congrats on a steady quarter. Sir, just on this milestone payment, because last quarter we provided a provision total almost of $15 million. So now if you add that variable component, almost it is stretching to $33 million for this is large account. So I mean is it -- I mean how has been the payback from that account? Whether as we know -- can we share like kind of what is the EBITDA and all it generated, that kind of stuff because it looks like a decent size of payment for that because -- yes.

Sure. Look, let me try to answer it in 2 ways, and Dinesh, you can jump in if I miss something. So first of all, right, this relationship has been foundational for us to build our Mortgage business, right? This we started when our Mortgage business was very small, and obviously, it's grown by leaps and bounds the business in no less part to the contribution from this customer group directly as well as the halo effect in taking their credibility to other partners -- to other participants in the mortgage fold. They continue to be our top mortgage client, strong healthy relationship. And with this, while the payout is obviously higher from what we had provisioned but that's part of the negotiation, but the reason is also that they have extended the engagement and continued to give us the preferred partner status for the future as well. To that extent, it reflects that. From a profitability standpoint, it's healthy margins, right? And we expect that we continue to keep the health of the relationship and continue to leverage this relationship in building a stronger business. Our intent was to create a mutual win-win structure where, while there is a fixed payout, there is also some incentive kind of philosophically in the continuation of the earnout structure which we had for them for the first cycle and now it kind of continues that philosophy in the next cycle as well. Dinesh, anything to add?

No. I think it's covered, Vipul.

Okay. And just -- what is the CapEx guidance for this year, sir? So just wanted to calculate the free cash flow and -- for this year kind of.

CapEx, I think last year was slightly higher, but I think current year also our estimation will be between $15 million to $20 million, which is normally we have. So I think we are targeting that number currently also.

Okay. So almost $30 million, including this outgo, $32 million approximately including the outgo, this will be the cash outgo for this year?

Yes. $12 million you are including the other one, right?

Yes, yes, yes. This payment. Yes.

Yes, yes, yes. That's true.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Thanks, Stanford. Thank you all very much. We very much appreciate your interest in Firstsource. We are excited about what lies ahead as we go about growing and strengthening the key parts of our business. And we look forward to your continued engagement in helping us build a fast-growing purposeful business. And look forward to coming back and talking to you next quarter. Thank you so much.

Thank you very much. Ladies and gentlemen, on behalf of Firstsource Solutions Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.