FSL - Firstsource Solutions Ltd. Share Price

In the Q1FY26 earnings call, management provided a positive outlook, reflecting strong business performance and growth prospects despite macroeconomic uncertainties. Revenue grew 23.8% YoY to Rs. 22.2 billion (US$259 million), and management is optimistic about sustaining top-tier growth, raising the revenue guidance for FY26 to 13% to 15% in constant currency.

Key forward-looking points include:

1. Large Deals: Management highlighted four large deal wins, marking the fifth consecutive quarter with three or more large deals. The average deal size from new logos has increased by 16% over the past four quarters, reinforcing market traction.

2. New Client Additions: The company added 17 new logos, the highest in three years, with nine identified as strategic. This broadens the client base and strengthens future revenue streams.

3. Vertical Growth: In healthcare, sequential growth of 2.3% and YoY growth of 13.5% were noted, alongside eight new logos. North America reported a 5% QoQ and 22% YoY growth in revenue, while Europe experienced a QoQ decline of 7%, expected to normalize in Q2.

4. Margin Improvement: EBIT margin for the quarter was 11.3%, with an incremental target of 50 to 75 basis points improvement annually. The company aims to further enhance margins through operational efficiencies and strategic investments.

5. Acquisition Strategy: Management announced the acquisition of Pastdue Credit Solutions, targeting growth in the UK debt collection market, which has a significant addressable market.

6. Operational Changes: The ongoing "UnBPO" strategy centers on integrating technology and automation into service delivery, encouraging non-linear commercial models which are expected to redefine client engagements and drive efficiency.

Overall, Firstsource Solutions Limited positions itself for steady growth through strategic deal wins, expanding its client base, and implementing innovative service delivery models while maintaining improved margins.

1. Question: Ritesh, this increase in guidance at the lower end, from 12% to 13%, was it because Q1 turned out to be better than what you expected? Or is it that you are expecting the next nine months to be better than what you were anticipating three months back?

Answer: Our guidance is based on a clear line of sight to the business over FY26. The increase reflects clarity at the lower end, while the upper end remains influenced by pipeline conversion. We're not accounting for macro changes but assume an accelerated growth trajectory ahead.

2. Question: How are demand conditions today compared to, say, three months back? Are they worse, better or broadly the same?

Answer: Macroeconomic uncertainties continue. However, our differentiated proposition, especially through the UnBPO playbook, resonates with the market, creating demand. Q1's new logo addition was impressive, providing a solid foundation for future growth despite the ongoing uncertainties.

3. Question: The $1 billion mark has been achieved already, at least from a run rate perspective. Any new targets that you want to set for yourself?

Answer: We've reached our $1 billion aspiration ahead of schedule, which validates our strategy. My focus is on building a consistent, high-growth business model. We're reviewing long-term aspirations internally and will share updates when appropriate.

4. Question: What is our policy on acquisitions going forward?

Answer: Our acquisition strategy involves seeking opportunities that enhance our capabilities and bring value to our clients. We prefer EBIT and EPS-accretive acquisitions, without a defined frequency, focusing on those that plug capability gaps.

5. Question: With the wage hikes coming in 2Q and 3Q, what is our confidence level on achieving our margin guidance for the year?

Answer: We are confident in retaining margin guidance at 11.25% to 12%. We have 37 margin drivers helping us maintain this guidance and believe that our initiatives will continue to yield results, despite upcoming wage hikes.

6. Question: The banking vertical was a bit soft this quarter. Can you provide insights on sector conversations?

Answer: The banking sector presents two narratives; Europe faced declines due to regulatory and macro uncertainties, while North America remains resilient, with a healthy pipeline. We believe the results from this quarter are not indicative of long-term trends.

7. Question: What are the main margin levers that we have to improve margins from the 1Q number?

Answer: Onsite-to-offshore shifts offer opportunities to enhance margins. We continue to optimize staffing strategies and incorporate AI and automation throughout our operations to drive efficiencies and maintain margin improvement.

8. Question: So, if I look at PDC, their margin profile is almost 2x of where we operate. Can our collection business operate at a similar margin profile?

Answer: Our collection business margins are higher than PDC's. The goal is to leverage our existing capabilities and blend in PDC's expertise, potentially enhancing margins across our collection services post-completion of regulatory approvals.

9. Question: What percentage of revenue today is influenced by digital AI transformation deals?

Answer: More than 50% of our revenue comes from non-linear commercial constructs, which include AI-driven solutions. We expect this percentage to grow as clients shift towards outcome-based models due to evolving market needs.

10. Question: Can you give a sense of the growth trajectory for healthcare margins moving forward?

Answer: Healthcare margins were affected by our focus on payer deals, which historically have lower margins. As these deals ramp up and our portfolio rebalances, we expect an improvement in these margins over time.