Firstsource Solutions expands its footprint to Australia

Firstsource Solutions expands its footprint to Australia

Mumbai: Firstsource Solutions Ltd, the business process outsourcing (BPO) firm promoted by the country’s largest private bank, ICICI Bank Ltd, is expanding its footprint to Australia, said its new chief executive Matthew Vallance.

“We are just starting operations in Australia, which we believe is a good opportunity, especially with increasing openness to outsourcing there," Vallance, who took over as Firstsource’s chief executive in the last week of July, said in an interview on Wednesday.

Technology market researcher IDC estimates the Australian BPO market at $5 billion (about Rs23,000 crore) in 2010.

Based on existing demand and outsourcing trends in Australia, Vallance expects the nation to contribute “about half of our UK revenues," once operations are fully established and matured. The US contributes about 60% of the revenue for Firstsource. The UK and India contribute 27% and 12%, respectively.

According to industry body National Association for Software and Services Companies, or Nasscom, Firstsource is India’s sixth-largest BPO firm. It had revenue of around Rs1,970 crore in the fiscal year that ended in March 2009.

Firstsource is also expanding its delivery centre in the Philippines, where it employs around 1,000 people. The company’s workforce in the South-East Asian country “would be significantly large" after the expansion, Vallance said, without giving details.

The new CEO has a big task on his hands. So far this year, Firstsource’s share price has slid by about 24%. On Wednesday, the stock fell nearly 2% to end at Rs25.90 on the Bombay Stock Exchange, on a day the benchmark Sensex shed 0.72%, or 131.95 points, to close at 18,179.64.

His immediate concern is about retaining employees, especially at Firstsource’s fledgling India operations.

With domestic attrition at abnormal levels of about 70%—much higher than 30% levels in the US and the UK—Vallance said there was no “silver bullet" to solve the problem. “It is an industry issue currently but we cannot use that as an excuse."

Attrition-induced wage inflation would be a pressure on profit margins in the short-run, but better employee engagement strategies could help contain attrition, he added, while ruling out using stock options as an incentive.

Vallance expects Firstsource’s three-year-old India operations, where telecom companies and banks are its major clients, to have stand-alone profitability before the end of the fiscal year.

Firstsource “is looking to improve margins and take Ebitda (earnings before interest, taxes, depreciation and amortization) margins back to the FY07 (fiscal 2007) levels", analysts Rumit Dugar, Manoj Singla, and Udit Garg of Religare Capital Markets Ltd wrote in an 11 June research note to clients.

“The company intends to achieve this by increasing utilisation levels to 85% from the 80% currently and improving margins in the telecom vertical," they added.

According to Srishti Anand, an analyst with ICICI Securities Ltd, Firstsource’s “Asia business unit, which is the domestic business, contributes about 12% to the company’s revenue. Almost 90% of its business comes from the telecom and media vertical whereas the balance comes from the BFSI (banking, financial services and insurance) vertical."

“The growth prospect for this vertical is highly dependent on the Indian telecom and media story. The Indian market is still under-penetrated with overall wireless tele-density of merely 46%," Anand added in an 18 March report. He expects Firstsource to improve its margin to around 9% by fiscal 2012 from 6.5% now.

Meanwhile, parent firm ICICI Bank may have to reduce its holding in Firstsource.

ICICI Bank chief executive Chanda Kochhar said in March that the bank is required, under US regulations, to reduce its holding in non-banking companies to less than 5%.

ICICI, which needs to comply with the requirement as it operates in the US, owns about 20% of Firstsource.