Firstsource Solutions Limited (FSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Maheshwari from Firstsource Solutions Limited. Thank you, and over to you, sir.

Thanks. Welcome, everyone, and thank you for joining us for the quarter ended September 30, 2021 earnings call for Firstsource. To take us through the results, and to answer your queries, we have with us today Mr. Vipul Khanna, our MD and CEO; and Dinesh Jain, our CFO. We will be starting this call with a brief presentation about 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 the SEBI and subsequent earning reports that are available on our website. With that said, I now turn the call over to Vipul Khanna to begin the proceedings. Vipul?

Thanks, Ankur. Good afternoon, everybody, and thank you for joining us today. Slightly belated, but wishing each of you a very happy Diwali, and may good health enjoy light of your lives. Let me give some quick remarks. So we had another steady quarterly performance in second quarter of fiscal '22. Revenues grew 18.5% year-on-year in constant currency, and came in at INR 14.286 million or $193 million. Operating margins were 12.5%, and EPS grew 30.7% year-on-year. Our business across our industry segments, and service lines, continues to scale well. The performance is a testament of the focus on a great growth framework. This means we continue to maintain a sharp focus on our 3 core industries of Banking and Financial Services; Healthcare; and Comms, Media and Tech. Second, modernize our offering, particularly investing in our Digital First, Digital Now approach; and 3, build a purpose-led, scalable and agile organization. First off, today, we have executed an agreement to acquire 100% of The StoneHill Group to add to our mortgage portfolio, and we expect to close this transaction by end of the calendar year. This transaction is consistent with our systematic inorganic growth strategy to add adjacencies to our existing offerings. We will discuss more on this in a few minutes. Let me walk you through this quarter's performance, and the key highlights in each of our industry segments. Our Banking and Financial Services segment grew by 13.4% year-on-year and 20.3% in constant currency in the second quarter. While we continue to see decent year-over-year performance, the mortgage business declined sequentially as expected. This is primarily due to the slowdown in the refinance volume in the Origination segment. Despite this decline, we are pleased that we gained market share from flight to quality, and a well developed on an offshore delivery model. The servicing portfolio in our mortgage business continued to make gains with strong expansion across existing and new clients. Our digital portfolio is scaling up nicely as well. The post-closing cost platform that I've talked to you about in the past, now has 4 active clients, and our first low-code no-code application went live for a key mortgage process and is, to my mind, a harbinger of increasing usage of low-code, no-code apps. Despite the inherent volatility of the refinance market, our long-term growth strategy has not changed. The real estate market in the U.S. is strong and is expected to remain so over the medium term. We consistently expand our existing client relationships while adding new clients to the mix. During this quarter, we added 4 new clients. At the same time, we continue to expand our capabilities in adjacent areas to leverage both our scale in the market industry, and the relationships we have built over time. The acquisition we just announced of The StoneHill Group is a great example of this. Let me switch to the collection business. This -- the collection business is underperforming our expectations, impacting the full year growth projections. We had anticipated a greater pickup in credit card receivables delinquency with the gradual opening of the U.S. economy. In fact, the delinquency rates are at record lows. Federal Reserve card delinquency rate for the last quarter was 1.54%, the lowest from record, since they started reporting this metric 30 years ago. So while consumer spending is increasing, the customers are paying off their balances due on time or are increasingly using debit cards for their purchases. This is impacting the volumes that we handle for our clients. While it is difficult to determine how long this trend will continue, the emerging macro view from analysts and bankers suggest that payment rates should normalize, and delinquencies should begin to rise, as the economic stimulus effects in. Now as with the mortgage business, we continue to expect the collection business to be a growth driver, barring this exceptional period of economic behavior. We continue to diversify our client base to other industry segments, and made good progress on a push to fintech and utility with a market-leading digital collections platform. As consumer payment habits evolve, we saw greater volumes from our fintech and BNPL clients in this quarter, albeit this is still a smaller share of the market. Our U.K. BFS business maintains its steady momentum, and we are quite excited about some of the deals we are currently working on. In fact, after the long 20-month hiatus, I'm traveling to U.K. tomorrow to meet our existing clients and some of these prospects. The Healthcare segment grew by 31.7% year-on-year and 32% in constant currency this quarter, and was the fastest-growing segment once again. We are pleased that our investments in new capabilities are beginning to pay off. In particular, the significant addition to our sales solution, and key delivery ecosystem for platform-based services, are being well received by the market and truly differentiating us. On the back of this, we are increasingly participating in large transformation deals. Recently, we closed our largest platform-based service or BPaaS deal with a large health insurance company. This highly competitive win will rearchitect the client's entire business operation by retiring more technology, and replacing the model integrated software and services solutions. We will take complete ownership of running and improving the organization's operations, while simultaneously modernizing the underlying technology stack. This deal is a reflective of the market's growing acceptance of BPM, and technology companies, collaborating for executing large-scale transformation. In this case, to improve member health outcomes and experiences, while delivering cost efficiencies. Now this is truly a pivotal deal as it gives us access to the BPaaS market and more importantly, validates our template of domain plus digital, which has time over the scale of integrated service providers. [indiscernible] 10 million TCV, and is our first $100 million deal in health care. And I believe this is the first of several partnership deals across the industry where clients choose best-of-breed partners to execute complex transformation by bringing the best of [indiscernible] departments together. Apart from this win, the pipeline of our digital intake business at its highest level, as we look to add more marking into our client to our client process. We added 2 new clients this quarter in our HPHS business. The volumes in the provider businesses have remained steady. As we discussed earlier, the public health emergency continues to remain in effect in the U.S. and a large number of states are still dealing with high COVID case load, impacting elective procedure volumes at hospitals. Over the last several months, we've been working to create a holistic and connected ecosystem of our solutions for the health care provider world. In this quarter, we launched our health care cloud. This will help us onboard customers faster, and enable them to modularly consume our services. In the first phase, we have launched 9 services across revisits, self-pace receivables management, and uncompensated care. I'm very excited with this launch, and the possibilities it creates for our business. Finally, our Communications, Media and Tech segment continues to perform well. In the second quarter of fiscal '22, this segment grew by 25% year-on-year and 18.3% in constant currency. The business and client relationships are steady, and we are capitalizing on growth opportunities. Our key clients witnessed lower volumes as summer months, and the opening of the U.K. meant more people were outdoor and less of cable and TV, et cetera, home. Also, the U.K. market is going through an unprecedented balance situation, leading to some demand execution challenges for us. Sales momentum is indeed picking up. We added [ 2 ] new clients this quarter, including new-age fintechs across U.S. and [ dollars ]. For these fintech clients, we are designing, building, and running their end-to-end operation, using components of a digitally empowered contact center platform. On another note, I'm pleased to say that Firstsource has been positioned by ISG as a leader in the ISG Provider Lens Quadrant Report on European contact centers. Firstsource was 1 of just a few named leader across 4 categories -- across all 4 categories: digital operations, artificial intelligence and analytics, work from home, and social media customer experience. This is a great validation of our focus on modernizing our offerings. Operator, can you hear me okay? I just got an echo back.

Yes. I can hear you, loud and clear.

Okay. All right. Let me give a quick comment on the talent situation. As you're all aware, both the U.S. and U.K. markets are going through unprecedented talent shortages driven by a multitude of structural and pandemic-related reasons. At Firstsource, the situation is no different. Attracting and retaining talent in both these markets has been challenging, resulting in some revenue being left on the table. We are executing a view of tactical and more structural actions to increase in hiring and retain talent for longer. The actions focus on better outreach, higher comps, a new incentive plan in targeted areas, and revamping of our training and on-the-job training strategy. At the same time, we are adapting to the evolving work from home, work from office dynamics as the economies open up. Let me give you some comments on The StoneHill acquisition. The company is based out of Atlanta and was founded in 1996. This acquisition provides a strong presence in the quality control, and due diligence segments within the mortgage business. The strong lending market, and climate of increased regulatory scrutiny mix, the quality control or QC, and due diligence offering, very attractive and add more links to our mortgage value service chain. In addition to allowing us to cross-sell their capabilities for our existing clients, The StoneHill provides us with deep access to mid-market lenders in bank. The purchase consideration for this acquisition is expected to be $27 million, of which 80% or $21.6 million will be paid at closing, and the balance after 12 months linked to earn-out. The company is expected to achieve $20 million of revenue in calendar '21, and this is likely to contribute about 60 to 70 basis points of growth to our revenues in fiscal '22. Finally, coming to the full year '22 outlook. We are revising our growth guidance to 14.5% to 15.5% in constant currency, including the contribution from The StoneHill acquisition. We expect Q3 revenues to be roughly flat sequentially. As we discussed earlier, the collection business is facing transitory macro challenges, and then there is a revenue impact from talent situation in our onshore market. However, this does not in any way detract from a long-term growth trajectory. We remain confident in our ability to drive top quartile growth industry. When we look to Q4, we see a strong momentum in the business based on the recent healthcare win we discussed earlier. CMT wins expected to start ramping up, and the historically stronger Q4 in collections. We are pleased with this expected Q4 momentum, which results in a run rate that sets up nicely for fiscal '22. We also realized that all this demand needs to be fulfilled, and we are feeling good about the impact of actions we are taking to attract and keep more talent. The operating margin guidance is maintained at 11.8% to 12.3%. With this, I'll pass it to Dinesh to cover financials in some more detail.

Hi, Hi, everyone. Thank you, Vipul, to give a quick summary of the Q2 financial performance. Revenue for Q2 came in at INR 14,286 million or $193 million. This implies a year-on-year growth of 20.3% in rupee term, and 18.5% in constant currency terms. As Vipul talked about on the margin front, operating margin came in at INR 1,791 million or 12.5% of revenue, which is a healthy growth of 31.9% year-on-year, and this implies a margin expense of 111 basis points. Profit after tax came in at INR 1,350 million or 9.5% of the revenues for the Q2. This is again a healthy 28.2% growth year-on-year with a margin expansion of 59 basis points. In the Q2, we have generated almost INR 2,429 million cash from operations, and our FCF was INR 2,271 million, which is after existing for CapEx of INR 158 million. Closing cash balance as of September is approximately INR 2,177 million. This came in as DSO was around 54 days, which is compared to the last quarter of 56 days. Let that situation further better off, as we repaid around INR 60 crores to INR 65 crores this quarter, and it stands at now INR 3,380 million or $45.5 million versus the last quarter, $53 million. Tax rate for the Q2 was around 18%, and we are still holding the guidance between 17% to 19% for the year -- for the next week. On the ForEx hedging side, are you aware of being we have a long-term hedging policy. And currently, we cover GBP 46.7 million for the next 2 years with rates ranging between 110 to 117 per pound. On the dollar book, we had around $81.6 million at average rate between INR 77 to INR 80 to the dollar. With this, we can open up for the question. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mohit Jain from Anand Rathi.

Sir, just 1 on your guidance. Did I hear it right, you're revising it to 14.5% to 15.5%, including the acquisition?

That's correct, Mohit.

So what caused such a sharp drop or decline in the guidance in the last 3 months from your commentary, it appears that, most other things seem to be on track, except that we had this big decline in 2Q. So are you expecting -- I mean, earlier, the idea of a few quarters back was, we should be able to maintain the current run rate of 4Q '21 during the year. Now it looks like you are expecting that in 4Q also you will see some drop. Is that a [indiscernible] assessment? Or what is your story behind this?

Sure. So Mohit, yes, so we have a kind of tightened the band to a percentage, and the lower end we have dropped by a little bit. From the last time we spoke, mortgage has declined, but that was expected, right? We've been talking about it. That's a kind of more inherently volatile revenue, right? It kind of peaked in Q4 of last year, then have trended into Q1, and then it started dropping, right? The unexpected portion has been collection. As I mentioned, the -- last year, the spends were low because people were decisions to spend below. But because people had a lot of cash, they've been paying up, right, which means that the volumes that we have from our clients to work on us, that's declined. And a few of our top clients have asked us to reduce capacity temporarily because the credit quality is so good. So that's been 1 big cause of why we had to a kind of adjust our guidance. And the second 1, I think as the economies have started to open up, especially U.S. and U.K., the talent shortage for our industry is pretty pronounced, right? Across sectors, you see everybody is a kind of trying to hire people. So I think that has caused some challenges for us on the revenue side. And U.K., obviously has the Brexit impact playing out through now, right, with shortage of labor is a kind of reflecting, and U.S. has its own shortages, as the economy opens up. So these 2 factors are primarily a kind of forced us to bring the guidance a little bit down. As I said, Q3 -- so the December quarter, we expect it will be a kind of similar to this year, but I expect that to be picked up strongly by Q4, which is our March quarter for FY '22 to a kind of a net-net [ land ] between 14.5% to 15.5%.

Understood. And sir, second, just a clarification. So when you say labor shortage, you would expect it to, expect you to sort of get it on the margin side, not on the revenue side. In this case, what you're saying is that our margins will hold up well, and we may have to sacrifice some revenues on account of [ tight labor in regions ].

Yes. I mean we're going to this pocket where we have demand, we're not able to a kind of get enough people to fulfill demand, right? India, we don't have that problem, right? India, efficient hybrid. There is enough supply. U.S. U.K. supplies tend to be limited. So there is some revenue which is less on the table. The callout on the margin is -- obviously, this was a strong quarter. But we have implemented incidents from October 1, so we'll see some impact on that. But also because of higher demand, it has allowed us to shift some of the capacity to offshore, which has the positive impact on the margin.

So, net basis, second half, you should broadly maintain at positive for the top levels from an EBITDA perspective, right? Or should we expect a little drop in doing that wage to recover effective?

A little bit drop. Overall, we're still maintaining our initial guidance of 11.8% to 12%.

The next question is from the line of Nagraj Chandrasekar from Laburnum.

Could you expand a bit on this large health care deal we won, who our partners are, what sort of solution we are replacing, who we competed with to win this, and what would be sort of the annual revenue impact of this deal because $100 million is a large number, and I guess it will be shared with the partner. So how would it hit our revenues and what the pipeline of such deals looks like in the future and what sort of win rates we expect here?

So Nagraj, this is the BPaaS deal, business process as a service, where combined with our partner. We are responsible for the technology stack, the up stack, and the design and analytics on top, right. The 3 core components to drive retain into the business. We have partnered with an IT services company. In fact, we have developed a number of IT services partnerships. So in this case, we've chosen a partner who a kind of fits the bill. We are the prime, and the partner will be a kind of the sub. And then there are a couple of other products companies -- technology product companies will be part of this sort of group of costs. The deal is $210 million. As I said, our share is about $110 million, okay? So that's the number a kind of I shared with you. And we expect -- at today's sort of starting point, we expect about 16-odd million a year revenue once -- there will be some choppiness once it starts and then a kind of settled down. But give or take about $15 million, $16 million a year of revenue from there, from the parent source and hopefully, where will we go from there. We won against the big ones, the big integrated players who do everything. So we won against sort of all Tier 1 competition. Long deal cycle. But it's the strength of our business knowledge, the strength of sort of how we brought different groups together to improve the business processes, which allowed us to win this deal. It's something which I'm keenly looking forward to a strong execution because then it opens up sort of the market. We are beginning to see more deals like this. We have a couple more, not necessarily exactly the same scope but similar transformation with different sort of architectures in the [ hopper ]. I'd love to win all, but realistically, first is the great 1 and then a kind of 7-steps of momentum. And I hope it gives you enough color on the deal.

Yes, that's very helpful. Congratulations on this again. Also on the collections part, which you've said has come back a bit slower than expected. The October month saw a very large amount of U.S. spending again on credit cards after a big period in the prior months. So typically, how long does it take for a large spending amount to sort of [ set it down ] do and to good collections numbers for us, number 1. And number 2, this large shift to spending away from credit cards towards the NPL. Is that revenue accretive or dilutive for us?

Sure. No, great question. So look, typically, card spend versus people who fall behind the delinquency start at 90 to 120 days, and then the write-off as per the current U.S. accounting standards, et cetera, I think 180 days, right? But there are more nuances to this. I think as you rightly picked up, the October spend has come up. But then we've got to see where is that spend? Is it mostly happening in prime or subprime? Because the prime customers who are mostly be the 1 who are spending and paying down, right? They're using it more like a charge card than a credit card. It's a subprime which revolved. And I think the time is at this time ahead on the spend, the subprime hasn't picked up as much. So there will be the lagged impact of that before it gets to delinquent. And your second question was around BNPL and fintech. Yes. So yes, I think they are passing segments. They're still a smaller portion of the total market. We are keenly watching it. We are fully into it, right? We already have -- we're already working with sort of 3 of the top 8 BNPL companies, with our digital collections platform because they want only digital solutions. And we have a very focused team targeting to work with other BNPL as well as expand the scope of our servicing not just from digital collections, but also go to merchant servicing and stuff like that. So a very hot trend, a lot of action there. And over time, I think this will only grow at the cost of credit cards. So we have to go both feet into that, while we still serve the bigger traditional card segment.

And just 1 last question on the mortgages. The absolute amount this quarter, and what was the servicing versus refi split here and how you see the decline levels from [ year on ]?

Yes. So this quarter, mortgages was roughly -- let me get my numbers right, so I will not give you the wrong number. This quarter, the mortgage, our mortgage business came in at about 55-ish set of million, right, for the quarter, something like that. And between the servicing and -- Ankur, help me with the split between origination and services.

I can talk to give it back to you offline.

[Operator Instructions] The next question is from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First of all, just trying to understand guidance. You indicated about the [indiscernible] that will contribute about 0.6% to 0.8%. Is it correct for FY '21?

0.6% to 0.7%, Dipesh, for FX -- FY '22, yes.

That is largely for Q4 kind of contribution, right?

That's correct.

What will be the mix in StoneHill revenue between Origination and Servicing? Because it seems they are not seeing that headwind, what our mortgage business is [indiscernible] Into?

Yes. No, good observation. So look, I think mortgage origination, if you break it into refinance, which is same property, same owner, just refinancing for a lower rate versus a purchase transaction, where somebody is buying a first house or second house, upgrading, what have you. QC and due diligence are used for both, but there is a heavier weightage for QC and DD or due diligence being used for more purchase transactions and for more complex mortgages, right? So the more vanilla products of mortgage for smaller tickets they go through because they're more standardized. But the more, what they call as nontraditional, those are a bigger portion of what the ultimate GSEs, the Fannie Mae and Freddie Macs want the QCs to be done for a greater portion of both. So I think there is some hedge to refi because greater portion of purchase, and then a greater portion of complex transactions, whether refi or purchase use, QC and due diligence. And second, due diligence mostly plays in the securities and the securitization. So whatever has been heavily sort of refinanced and so many transactions that happened in the last 2 years, right, given the low interest rate A lot of them are now going through or will go through securitization and change hand. And then during this change of hands of the securitized portfolio is when due diligence gets you. So that kind of gives us an element of hedge to pure refi originations.

Okay. And for the current calendar, you indicated revenue to be around INR 28 million for that entity?

No, INR 20 million for calendar '21. INR 20 million, 20.

Okay. And in terms of [ grand profile ], whether it helps us to diversify and reduce dependency on a few clients in mortgage business or acquisition or it won't have any material difference for us.

100% complementary because they usually service the mid-market lenders and the smaller banks. We generally play with the bigger originators and banks. So this is a new complementary market, and we think we can take some of our title services, et cetera, to the smaller bank market. And likewise, you paid their services, and sell to our bigger clients for QC and due diligence.

Understood. And whether it operates a similar profit margin of our mortgage business or it is deepen considering 100% on-site kind of thing?

They are -- they are 100% transaction-based pricing and also, they have good technology, which is integrated. So despite being onshore, they have healthier margins.

Understood. Second question about the large deal, which you indicated. If you can provide some detail, I think you gave some detail like INR 16 million revenue from that and other things. So from when do you expect the deal ramp-up to play out? And second thing is the supply challenges what we are witnessing. Do you think any implication it could have in terms of overall ramp-up plan for that deal?

Not in that deal. We -- first of all, from a time line perspective, we expect that deal to a kind of start going on track from Q4, right? So January, February onwards, will start the implementation. . There is a small rebatch portion that we're doing, which a kind of gives us a head start. And then it's a heavier component of offshore to India and Philippines, where the talent market is -- still has a lot of runway. So I think talent won't play -- talent constraints won't play a role in that deal.

Understood. And coming to the last 2 questions from my side. Coming to collection business. Can you provide some detail about, let's say, what was the revenue run rate, where it currently operates in, how do you expect it to play out in the next 2 quarters? If you can put some detail, just to understand the kind of challenges and volume weakness we are witnessing in the business.

Yes. So last year, fiscal '21, we did closer to sort of 65-ish million on that business, right? Q4 is a strong quarter there because there are higher collections from tax refund, et cetera. So there is some seasonality of -- in that collection business. We are -- we have seen a sort of flattish to now declining somewhat Q2. We expect Q3 to be flat. There will be a seasonal strength, which will come up in Q4. Net-net, our sense at this point that for the full year '22, collection will be very marginally up from last year, while our original forecast was a stronger company set of average growth. But right now, we expect it will be a marginal up given just this a lack of volumes in that segment.

So broadly, the difference is our growth expectation versus flattish performance. It is not like it has started declining for us.

No, because of the growth from fintech and BNPL and stuff, right, there is that. And then there is a downdraft from our traditional client base for now contracting, but it's still a net growth.

Understood. And the last question is on the top line. This quarter also, I think we are alluding to some of the volumes slippage headwind because of supply chain [indiscernible], plus Brexit-related things, and economy of [indiscernible] . So how 1 should expect Q2 is now more sustainable run rate or do you expect further weakness to happening on top line?

Okay. So for our top line, I mentioned 2 reasons. 1, the summer months are generally soft for them, right, because the big sports et cetera, franchises a kind of take a break, people are more out in stuff. So there is less trading activity that they see on the client, it generally picks up in the December quarter because that's a festive season and stuff like that. And plus, there is a new product launch as well. So we're starting to see more volumes comes through. And the good thing is there is now a little bit more weighted towards offshore. So it helps us on the talent side as well given some of the constraints on onshore. So I expect a pickup in Q3, and then sustaining that in Q4 for our top line.

So because last year base is very high for H2 perspective, if I look at it. But do you expect Y-o-Y growth to [indiscernible] in H2 perspective?

I don't have that handy.

Roughly INR 67 million was the number for last year H2. Currently, we are at somewhere around EUR 30 million, Q2 run rate.

Yes. Also, do you have the sense of what do we have the latest on H2 from this?

No, we don't have the H2 [indiscernible]. Dipesh, again, this is something that probably I can pick up [indiscernible] .

And sorry, Nagraj, if you're still on the call, just to come back to your question. It was Q2 on mortgage, the breakdown between origination and servicing was 67, 33, the 2/3, 1/3, which was compared to the previous quarter was more like 70, 30-ish. So there's a good 3 points movement that servicing kind of pricing, but also the compression in the overall mortgage business.

The next question is from the line of Shradha from Amsec.

Just to ask you more on the guidance perspective. We are talking of this last year ramp-up to happen in 4Q. And despite that, we are cutting off full year guidance? So do we expect further moderation in our mortgage business from the current transit? Or what is it that is leading to upcoming guidance despite help from this deal, which will come to us.

Yes. So Shradha, as I said, I think because of the expected slowdown in mortgage, or not slowdown, reduction, right? Because last year's volumes was a kind of seasonally high. Now as interest rates come up, the refi volume will drop, while the purchase volumes will continue, right, to grow because the real estate market is still strong in the U.S. So that reduction in refi volume a kind of started in June quarter, right? We saw more of that in September. I think it will continue a little bit more and then stabilize. Hopefully, by Q4, if not by Q1 of next year. But this is all as we expected in the mortgage business. The reason primarily for us to tighten our guidance from 15%, 18% to 14.5% and 15.5%, primarily, as I said, is from the unexpected macro conditions, which are impacting collections, and somewhat the talent situation in U.S. and U.K., which is leaving some [indiscernible] demand for us. Those are the 2 reasons. But I still expect at this time, sitting in sort of mid-November, that Q4, we should see a good pickup of demand. And we'll a kind of book the revenue, not just for the large deal, but also from some of the other CMP deals that we've signed. So some pickup -- the seasonal pickup in collections, but Q4 should be strong. And hence, when I look at the entire year, we had these 2 quarters of macro condition-driven turbulence, but I think we come back to Q4 and then sustain that in FY '23 is the sense we have at this point in time.

Yes. So just in term this number to mortgages that is close to $55 million to $56 million in this quarter. So can we look at this number going below $50 million by Q4 and then stabilize in there?

I think that we will see some reduction from the current level, exactly where it goes down. There are some moving parts and deals in the pipeline as well. So I think we'll wait for another quarter to say where we end up in Q4. But I think the reduction and the full impact of the reduction will have some impact on our numbers. But at the same time, the new wins from servicing, as well as some synergies from Stonehill from Q1 of next year, I think that will provide us the buffer to sustain that business.

Right. And just 1 other question. [indiscernible] That we have some payments [indiscernible] this acquisition of StoneHill and the others there is the payments which we have to make to the mortgage plans. So how are we looking at funding these payouts all from internal [ activities ]? Or do you have to do raise some to fund the payouts?

No, I think our free cash flows are pretty strong. We made our first payment to our mortgage clients in July. And I think the next 1, a kind of coming up until next financial year, start of next financial year. And as I said, the StoneHill acquisition is about a $21.5 million payment, and closing at the end of the year. The rest is after 12 months. So I think this will do comfortably from our free cash flow. Obviously, we'll keep working with our working capital limits and stuff. Dinesh, you wanted to add any more color on that?

I think that's true, Vipul. All going to be funded through internal accruals that's all.

And which should not changed any -- we should not see any change in our payout policy [indiscernible] Business?

Payout policy in the sense of dividend you are talking?

Dividend payout, I mean, last 2 years have been strong in dividend payout. So given that we have such payouts in terms of acquisition and other client specific payments. Should we see any moderation in our dividend payer this year?

Yes. So it's early for that, right? Maybe just about at the midyear point. At this point in time, we see good cash flows, right? And still, a business even at the midpoint of our guidance, the business, which is still growing at 15%. So I think the business is on a strong footing, and we'll see where we end up in the next 2 quarters from a dividend standpoint.

Okay, sure. And, Vipul, just 1 thing, you've said. You would have some impact of wage hike in Q3. Did I read it right?

Yes. Yes. For parts of our colleagues, we've implemented, implemented it from October 1. We'll see some impact of that in our Q3 numbers. But as I said, we're still maintaining our full year guidance and margin of 11.8% to 12.6%.

And if I'm not wrong, we had given out certain hikes in Q1 as well. So is it another [indiscernible] that you are giving a [indiscernible] in Q1, if I recall right, we had some impact of taking that review.

No. We had done our last hike in for parts of our population from effective January 1, right? So we're now trying to cut back in the cycle after last year was a little bit of a unique care, right? Even COVID and stuff like that. So that was Jan for. This is October. And we'll see -- I think this is our sense it for now. We want to keep this as a --- site for the future.

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

A couple of questions. First, earlier as we indicated last quarter earnings call mortgage business, you expect double-digit organic revenue growth, excluding strong [indiscernible] which we did. Do we believe we can deliver double-digit revenue growth for a full year, considering where we are in Q2?

So yes, Dipesh, it will still be a net growth year. At this point in time, we are looking at somewhere between high single digits to a kind of early double digits, right? The pace of the decline in refi market has been dynamic. And we'll see how this plays out. But at this time, we're still very confident of achieving net growth, whether that's high single digits or early double digits to a kind of get a sense in the next 2 or 3 months.

Okay. Second question is about The StoneHill run rate. You indicated for the year, we expect around INR 20 million for current year. If I look the 9-months, which we reported, it is somewhere around INR 17.5 million, which indicates the run rate at likely to materially deteriorate in Q4 per se. So how 1 should look for next year perspective? Whether the -- and what explains any particular seasonality in that business? Or why it is so low in Q4?

I think the -- so they have 3 businesses. They have QC, they have due diligence, and again, they have a portion of what is called fulfillment, which is similar to what our origination refinance business is. They had a little bit of a choppy part of that business, which was they have that as it does. Like us, they had a good first half of the year, and like us as industry volumes decline, they are seeing some compression there as well. That's the portion which is declining somewhat as they come into the fourth quarter. The QC and DD businesses are stable, and they're growing. I think at this time, as I've said, we've modeled them at about -- they modeled at about 60 to 70 basis points of our revenue growth, somewhere between, I think, 4 million to 4.5 million.

Okay. So it would be [ $21 million to $22 million ], not [ $ 20 million ]. Am I right to understand?

Sorry, I didn't understand the math.

Because 9-months, they did [ $7.3 million ]. If they do [ $4 million to $4.5 million ] in Q4, then run rate should be [ $21 million to $22 million ] for the year.

You were talking about [indiscernible]. No, I was answering for your going forward sort of run rate for us once we can [indiscernible].

Or it should be somewhere around [ $4 million to $4.5 million ] quarterly run rate?

At least that's the start point. And obviously, the synergies will come from them.

Yes, that's the assumption. And last question is about if I look, BFS, excluding mortgage business. It seems to have declined 10 percentage. So closer to double digits quarter-on-quarter. Now earlier, you've suggested collection business is largely flattish. So what explains this weakness in nonmortgage business in BFS?

There is obviously an element of seasonality, which I mentioned. If you would take the seasonality out collection has been sort of flattish. But obviously, there is some decline at this point in time. And second, the U.K. component, right, of our BFS business also had shades of the talent situation coming into play there.

Do you expect it to reverse because I think the non-mortgage business is to do well for us, which to some extent can help us to mitigate mortgage weakness. Do you expect it to bounce back in the next 2 quarters also?

Yes. I think, as I mentioned, the talent situation, I think, will start to a kind of get ahead of as this quarter goes by and next year comes in, next sort of calendar year comes in. Second, I think the pipeline is good. The demand pipeline seems to be strong in the U.K. BFS. I'm excited by a couple of transformational deals in the play coming up into their final stretch. Yes, I think we should start to see strength coming back into the U.K. BFS in Q4.

Understand. And last 1 clarification, I think you indicated, services and origination, we've see 1/3, 2/3, right?

Yes.

So it seems your servicing business also declined this quarter, roughly around double digits Q-o-Q.

No, it was flattish. I don't -- no, I don't think it's declined. It was flattish and that's why it a kind of grew up as a percentage compared to the previous quarter.

Okay. Okay. I see. Because my number was indicating something.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Great. Well, again, thank you, everyone, for your interest and great questions, as always. I think we gave you a good sense of how Q2 was, and gave you good color on sort of how Q3 would be. I look forward to coming back in 3Q and speaking to you again in a few months, and hope everybody stays safe, well and healthy. Take care.

On behalf of Firstsource Solutions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.