Firstsource Solutions Ltd

NSE:FSL

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day and welcome to the Q4 FY '22 earnings conference call of Firstsource Solutions Limited. [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.

[Ankur Maheshwari, executive]

Thank you, Steven. Welcome, everyone, and thank you for joining us for the quarter and the year ended March 31, 2022 earnings call for Firstsource.

On this call, Vipul Khanna, our MD and CEO; and Dinesh Jain, our CFO, will provide an overview of company's performance, followed by Q&A. Do note that the results, fact sheet and the presentation have been emailed 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 that 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 the risks are included, but not limited to what we have mentioned in our prospectus by the SEBI and subsequent annual reports that are available on our website.

So that said, I'll now turn this call over to Vipul Khanna to begin the proceedings.

[Vipul Khanna, executive]

All right. Thanks, Ankur. Good evening, everyone, and thank you for joining us today at this late hour. It's the bright crisp morning here in California, but I should qualify that I'm generally slow in this morning, this early in the day, especially for this high-quality audience.

So let me get started with a quick snapshot of the quarter gone by. Revenue grew 3.1% year-on-year in constant currency and came in at INR 15,439 million or $205.5 million. Operating margins were 11.3%. And EPS grew by 1.6% year-on-year.

For the year gone by, we achieved revenues of $795.2 million, implying a constant currency growth of 14.6%, in line with the recent guidance. Operating margins came in at 12%. And the EPS at INR 7.6 grew by 19.4%, normalizing for the exceptional charge last year. The higher increase in EPS is particularly heartening for us, considering the inflationary pressures, especially in the back half of the year.

Looking back on FY '22, this has been a mixed year. On the one hand, we were disappointed at underperformance to the guidance we set up at the beginning of the year. As we have discussed on past calls, a [ medley ] of macro headwinds impacted many of our businesses.

On the other hand, we are pleased with our focus, our investments and our progress in strengthening the foundations of each of our businesses. We believe that sets us up nicely for FY '23 and beyond, notwithstanding the impact from the expected significant decline in the mortgage origination market in the coming days.

The strategic focus that we established a couple of years back has 3 components. One, investment in our 3 core industries of Banking and Financial Services, Healthcare, and Comms, Media and Tech. Consolidating our leadership position in our chosen sub-verticals and systematically adding growth adjacencies to them.

Similar to BFS and Healthcare provider business, our HPHS business has now achieved leadership position in this positive segment. The acquisitions of TSG and ARSI have added valuable growth tools to mortgage and collections, respectively.

Two, push forward on our digital solutions and services to take disruptive offerings to market in each of the industries. Our offerings like digital collections to consumer debt and digital intake in healthcare are now recognized category leaders in [ both segments ].

And three, above all, bring the purpose-led, scalable and agile organization. This mission is steadily taking root and helping attract world-class talent and is, more importantly, resonating with clients as they progress on their own ESG agenda.

Let me talk in detail about our segment performance and the road ahead. In financial '22, our Banking and Financial Services segment grew 11.1% year-on-year and 9.7% in constant currency. BFS started out strong, but collections and mortgage faced macro headwinds, some anticipated and some unexpected. U.K. BFS held strong and grew steadily.

Let's talk mortgages. So [ by fiscal it ] will be a year of sharp degrowth compared to financial '22. We expect this business to stabilize by end of Q2 FY '23. Mortgage rates have spiked dramatically since we last spoke on the back of the worsening macro environment. 30-year mortgage rates today are close to 5% to 5.5%, the highest we've seen in the last 12 years. For perspective, these used to be around 3% in December 2021. This big movement in interest rates has significantly impacted the refinance market. Additionally, we expect it will also start impacting the marginal buyers in the home purchase market.

In reaction, our clients have been reducing origination capacity, both in-house and with us and other partners. While we are actively aligning our cost structure to the revised demand, the sharp pace of decline and lagged impact on cost will lead to margin pressure in this financial '23.

Nevertheless, the mortgage industry cost base is still very high for the reduced market volume. This will generate longer-term client needs for strategic cost solutions encompassing deeper offshoring, automation on-field and back-office processes and digital point solutions. We are evolving our solutions to align with our clients' current focus as we continue to invest in longer-term goals.

So, for instance, we have prioritized specific accounts and have deeply engaged with them in crafting operating models for this new market cycle. I'm encouraged by the quality of client conversations and specifically the appetite for strategic changes to their ops model in contrast to the [ baseless ] capacity augmentation approach of the last few years.

We have seen good traction for our post-close and the due diligence offering from the TSG acquisition. The services segment remains steady. And although there may be some near-term pressure on revenues as clients reallocate excess refi capacity to servicing, we also see additional opportunities from likely uptick in 2 areas, default servicing and securitization modeling.

Sales efforts continue to yield good results. We added 4 new clients this quarter. Recognizing our strength, portfolio size, market impact and competitive positioning, we are pleased that the Everest Group has recognized us as a leader in the Mortgage Operations PEAK Matrix '22.

Amongst the volatility in the originations market, it is easy to lose the perspective that we have grown this business to almost 3x the size of what it was 2 years ago at the start of this origination cycle. We have provided historical data on market volumes and portfolio mix in this quarter's [indiscernible]. Normalizing for the refinance revenues for the last 3 years, we've built a solid core of servicing business and a sustainable origination portfolio size.

For our collections business, we are encouraged by the momentum we are seeing. Macro indicators are pointing towards the return to normalcy. As per the recent data published by New York Fed, outstanding credit card debt in January '22 surpassed for the first time the highest debt in 2019. Payment rates have begun to decline and the delinquency behavior is starting to come back. Delinquencies increased to 1.62% in the quarter ending December '21 versus 1.54% in the prior quarter.

Please note, this is the latest Fed report, and we await the March quarter data. As I mentioned earlier, we have been focused on a number of actions to strengthen this business by augmenting our state of leadership and capacity, enhancing the full scope build of our digital connections platform, which is now reaching critical mass, and diversifying into newer segments of fintechs and utility.

To offset lower business volume, we aggressively secured new clientele in financial '22. We added 11 new clients this year, most of these fintechs [indiscernible] digital collections. These wins will deliver their full year potential in FY '23, and sales momentum is expected to remain strong in the year. As consumer spending and delinquencies continue to rise, we should start to see volume recovery in H2 in the core card receivables management segment.

We closed the acquisition of ARSI last quarter. The integration is progressing as planned. We are fine-tuning the operating model, adding more digital capabilities to their core platform. We've renewed the sales focus, and the pipeline is building nicely. Cross-sell opportunities are on in full earnest. In fact, in the last few months, we have already secured one cross-sell [indiscernible].

As previously mentioned, the ARSI operates at a lower margin compared to the rest of our business. We are working through the cost synergies and operating model [ in SGA ] and expect it to come closer to the overall margin by end of the year.

The U.K. BFS segment remains steady. In the past few calls, we talked about the talent supply challenges and their impact on revenue growth. We have strengthened our delivery architecture by opening a new satellite location in the U.K. to increase talent access and also targeted compensation assessments. All financial '22, this segment delivered modest year-on-year growth, and in Financial '23, we expect healthy growth from this segment.

The twin impact of a post-pandemic economy and continued digital adoption is driving a change in demand to more complex higher-value services such as broad management support, compliant transaction monitoring and complaints handling. We continue to add capabilities towards creating a comprehensive customer life cycle management group. And while the talent situation in the U.K. is structurally challenging, it also creates opportunities. Clients are now actively re-looking at their location strategy for CSR.

The U.K. financial services segment is slowly but surely increasing its usage of chat as a sales channel. This bodes well for offshore growth. And we had 2 meaningful wins for offshore chats this year. And lastly, strengthening our go-to-market efforts to drive new clientele is one of my primary focus areas for financial '23.

Shifting to Healthcare. In financial '22, Healthcare grew 28.4% year-on-year and 27.7% in constant currency. Our HPHS business maintained its strong growth trajectory. It has been consistently growing over the last 8 quarters. Our fourth quarter '22 revenues are more than 2/8 of the revenues we delivered in fourth quarter of 2020, all organic growth. This business remains focused on landing and expanding into the top 10 health plans, digital intake, bespoke BPaaS solutions for big market health plan and co-creating telehealth RPM solution with our clients.

I'm pleased that we are now participating and winning large complex deals, leveraging our solution skills and platforms. The growth trajectory of this business has validated the playbook of driving top quartile growth in a mature market by investing in leadership and go-to-market capability and by taking disruptive solutions to clients.

We are pleased that our efforts have also been recognized by experts. The evidence of citing our digital-first approach, disruptive solution and strong recognized us as the leader in the Healthcare Payer Operations PEAK Matrix for 2022. And we expect this growth momentum to continue in financial '23 as well.

The growth in our provider business has been impacted over the last 2 years. COVID impacted consumer behaviors, hospital priorities and disrupted the revenue cycle for healthcare providers. And while the public health emergency has been further extended, we are seeing that hospitals are now far more open to engage. The talent supply and cost challenges for this industry are acute, and we sense an eagerness amongst clients to explore more strategic solutions.

Earlier in the year, we renewed our focus on investment in sales, [ solution and data ]. These are now beginning to pay off. During fourth quarter, we achieved more new wins than any quarter over the last few years. Our strategy for this segment is to develop and integrate digital solutions for the RPM value chain, growing to geos in the US where we are under-penetrated, and develop stronger capabilities in receivables management.

We are pleased that we've been ranked #1 in the 2022 Best in KLAS Software & Services Report and noted as a leader in the Eligibility and Enrollment Services category. This report is based on the insights gathered from thousands of healthcare organizations, including direct feedback from our customers.

We are now more confident of the provider business coming back to a growth trajectory this year. With the continued strong growth of HPHS and the return to growth provider this year, healthcare should be the flag-bearer for company's growth in the coming year as well.

Finally, our Communications, Media and Tech segment continues to perform well. In financial '22, the segment grew by 17.5% year-on-year and 12.5% in constant currency. Our largest client business remains robust as does the health of our relationship.

As I mentioned earlier, the U.K. talent supply challenges have necessitated the fine-tuning of a client's location mix. We successfully transitioned a few complex operations from U.K. to offshore. This impacts revenue, but it's more profitable. Notwithstanding, in financial '22, we delivered single-digit growth, and we're confident of similar growth in the coming year, given the ramp in progress and potential new opportunities.

The rest of our CMT portfolio made heavy progress in financial '22, growing by about 50%. In this quarter, we added 3 new accounts in intake across CX, automation and [indiscernible].

Finally, the last comment, the digital media market continues undergoing a massive change with the shift from print to digital, and within digital, a shift from ad revenue reliance to more subscription-based models. Subscription revenues necessitate higher levels of customer engagement and innovative strategies for acquisition and retention. We are operationalizing tools to deliver personalized user journeys, resulting in greater acquisition and retention of subscribers. We are excited about this playing meaningfully in this segment.

Considering the growth momentum across businesses and the macro environment, [indiscernible] growth of 7% to 10% for financial '23. This factors in the reduction in the mortgage business and growth in the others. Just to put this into perspective, our organic growth, excluding mortgage and excluding acquisitions of StoneHill and ARSI, is expected to be between 18% to 22%. This is driven by go-live of recent wins across healthcare, BFS and CMT, pipeline build-up and conversion, and gradual improvement in the business environment and the provider and collection market.

As we mentioned before, this success in building a more holistic and diversified book of business is a direct result of long-term investment we've been making in the last couple of years. For the year, operating margins are expected to be in the range of 10.5% to 11%. Margins will primarily be impacted by 3 key factors: the sharp decline of the mortgage business in the first half of FY '23, as we work to align the cost structures with revenue. We do expect to see a recovery in margins in the second half of financial '23 as this business stabilizes.

Second, inflation, which is raging in the U.S. and U.K. and is at a multi-decade high. While clients are receptive to price adjustments, there is again a gap in quantum and timing. And third, the model's dilutive impact of our financial '22 acquisition of ARSI.

FY '23 will be a year of transition of our revenue composition. The business profile now is less volatile and provides a strong base for sustained high-quality growth. We are confident on emerging stronger and delivering sequential growth from Q2 onwards and on normalizing margins by end of this year.

I will now pass over to Dinesh to cover the financial details.

[Dinesh Jain, executive]

Thank you, Vipul. Here is a quick summary of Q4 FY '22 financial performance. Fiscal FY '22, our revenue was INR 59,202 million (sic) [ INR 59,212 million ] or $795.2 million. This translates to constant currency growth of 14.6%. We achieved operating margin of 12% and tax margin of 9.1%.

Revenue for Q4 came in at INR 15,439 million or $205.5 million. This implies a year-on-year growth of 5.5% in rupee terms and 3.1% in constant currency terms. On the margin front, operating margin came in at INR 1,751 million or 11.3% of the revenue for the quarter, which is 3.2% degrowth on a year-on-year basis and implies margin decline of 102 bps.

Profit after tax came in at INR 1,324 million or 8.6% of the revenue for Q4 FY '22. This is 1.2% year-on-year growth on normalizing with a margin decline of 37 bps. In Q4 FY '22, we generated $1,119 million cash from operations. Our free cash flow was INR 855 million after adjusting for CapEx was INR 264 million.

For full year FY '22, our cash flow from operations was INR 7,870 million and free cash flow was INR 7,141 million. We declared and paid an interim dividend of INR 3.5 per share with a total outlay of INR 2,439 million in the last quarter. Our closing cash balance as of March 31 was approximately INR 2,084 million.

DSO came in at 57 days in Q4 versus 58 days last quarter. Net debt as of March 31, 2022, stands at INR 8,013 million or $105.7 million versus the INR 5,882 million or $79 million as of December 31, '21. Tax rate of the Q4 was around 17%, but for the year FY '22, the tax rate was 17%. For FY '23, we expect to be within the range of 18% to 20% for the year.

On our ForEx heading, we have coverage of GBP 34.6 million for the next 12 months with average rate of around INR 114 to £1. Coverage for dollars was $52.5 million with average rate of INR 79 rupees to $1.

With also I think the one correction, which we have in the fact sheet which have been sent out to you all guys, this is the onshore-offshore mix for Q4 has a slight change in the numbers, which I think there are some mistakes there, which we have rectified and uploaded on the website as well as I think has been sent to all of you through the mail. So please note the same. With this, we can open the call for the questions.

[Operator]

[Operator Instructions] The first question is from the line of Manik Taneja from JM Financial. Please go ahead.

[Manik Taneja, analyst]

Thank you for the opportunity, Vipul, and appreciate the [ team's makeup ] around the mortgage business across [indiscernible]. I wanted to pick your brains on what we've been hearing from some of your peers for [ this existing of very ] robust demand environment for BPM, saying that there are both larger deals, faster distribution in terms of client business than what we've been used to. Could you comment on what you think about this aspect? And is it being driven by the underlying tight labor market conditions?

And the second one essentially is, if you could also talk about what proportion of your business comes in from the digital-native customer base and how that has been growing in recent times. I would appreciate if you could talk about your strategies in this regard, given the fact that you have been teaching about the focus on BNPL and the fintech customer base through the different quarters.

[Vipul Khanna, executive]

So, Manik, your first question was around the overall BPM demand environment outside of mortgage, yes?

[Manik Taneja, analyst]

Yes, that's correct. So I wanted to understand what some of your peers have been talking about larger deals and faster than the usual decision-making that we've seen on the retail side. Because BPO simply has been associated with longer sales cycles. If you could talk about what you are seeing in the marketplace.

[Vipul Khanna, executive]

Yes. So I think in general, we are seeing as this -- especially for this calendar year, I think the demand environment has certainly strengthened if you think about healthcare, if you think about CMT. Banking, obviously, the same segment as for mortgage and collection is somewhat unique. But for instance, if you look at BFS, we're seeing good demand. Is it larger and structured deals? Yes. I think a little bit spotty, depends on the segment you play.

But, in general, I think the practical opportunities that people had to do over the last 18-odd months, I think they are now done for. Now it's more about stepping back and seeing the labor market, the cost situation and inflation. I think this is prompting a little bit of step-back and think about more strategic deals.

And if I could comment specifically on mortgage, while we've seen a sharp pullback in the current capacity, but that's kind of practical action. What you're seeing is that the cost base is out of whack, the new reality. And even that segment is stepping back and saying, "How do I now align my cost base more structurally?" And that invariably means more strategic outsourcing, including all components of it, right, and not just sort of capacity augmentation or [indiscernible]. So yes, I would echo that -- the comment that you kind of mentioned.

On the [ bond ] digital segments, we have two focus areas. One is around fintechs, both for our collections offering as well as broader. And the second one is the digital media segment for now. The fintech segment is growing very robustly. We want to take some collections, and you've seen other wins in back-office and customer service.

Obviously, this is dotted by smaller names. So in terms of your deal size, they're not massive. But [ BMPL ] segment, if I look at the progress we made in the last 6-odd quarters, we built up a very nice portfolio of about 6 of the top 10 and some out till the top 10 as well. And I think that segment, the share of payments is increasing. So a good progress there.

This is one of the focus areas for '23, that how do we go beyond collections into more meaningful areas of fintech, including going into the crypto arena. So that is kind of sucking up a lot of capital, a lot of investments into going -- consumer investments are going there. The demand for servicing there has grown up. We've had 2 wins in the crypto segment, small, but we want us to build on that foundation.

And then digital media has performed really strongly. We had 3 wins this year. And given the -- going back to your comment about strategic, given the quality of solutions they need, again, I see good demand for strategic solutions on the digital media segments. We have currently narrowed on this tool while we continue to work on the big tech companies, right? That is something which we continue to kind of stay at the market and try to find meaningful opportunities in the big tech space of the [ bond business lines ].

[Manik Taneja, analyst]

Sure. And would you want to call out the [indiscernible] revenues from the so-called designated customer base currently?

[Vipul Khanna, executive]

You know what -- so we need to kind of do some alignment. Right now, we run it in 2 segments, right? We run it in the BFS, and we run in the CMT segment. So we need to kind of start to find a way of kind of give out that cut of the revenue. I don't have it handy.

But the other proxy for that if you think about the digital revenue perspective, right, from a service line perspective, what we call as Digitally Empowered Contact Center, back-office and platform and analytics. So the platform and analytics portion has a good jump, and for this quarter, we -- that was about 19% of the revenue. Slightly different customer, if you're looking. This is more inherent digital solutions bought by companies across the sector.

[Manik Taneja, analyst]

Sure. And one last one. Basically, this structure uptake in terms of demand is driven by the labor situation in your view?

[Vipul Khanna, executive]

I think it's labor. And coming out of COVID, once you're done with the tactical action, you already had digital going, it's now about stitching it together and starting to look at a broader value chain, a bigger portion of the operations. Like for healthcare, we're currently working on 2 extremely large [indiscernible] from top-end health plans, which not only encompass their existing portfolio with the sort of the market, but also encompassing now other scope, which has not been outsourced or has been considered more onshore-centered, right?

So now the openness of nearshore and offshore adds up greater opportunities to target the service value chain, right? Because earlier, there was very clear distinction, I don't want to do it offshore. But now it opens up that as well. So, yes, partly triggered by the talent situation, but technology and location add up the 2 dimensions for the scope of this.

[Operator]

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

[Dipesh Mehta, analyst]

Yes, thanks for the opportunity. Just want to understand our guidance for '23. Now organic growth guidance ex mortgage, acquisitions, 18% to 20% is a healthy number. How do you expect the trajectory of that number, whether we will see a steady ramp up across the quarter? Or you expect it to be more back-ended kind of thing? The reason for asking is some of the segments like collection business still not reached to normalcy level, delinquency is increasing, but not yet to earlier level.

[indiscernible] provider side, PAC got extended, so recovery may be delayed. So if you can provide how we expect trajectory to be, whether from Q1 onwards, we expect normal growth [indiscernible] or it would be back-ended?

Second question is about EBIT margin trajectory. We guided 10.5% to 11% for current year. But how we should look medium-term for source margin trajectory, whether this year is exception and we will return back to our normal margin trajectory entering into FY '24? If you can provide some medium-term outlook for margin trajectory, considering the business mix change what we expect to happen over the next few quarters and investment plan?

[Vipul Khanna, executive]

Yes. Thank you, Dipesh. And Dipesh, given your -- generally your questions and data, we've given you a lot of data this time on the market side, so there is full perspective, right, on how it is moving. So trajectory, over the years, at an overall company level, Q1 will be flattish because the impact of mortgage decline will kind of take away all the growth that may come from other sectors. And we expect mortgage sort of will bottom out by Q2 and then start to stabilize and sort of have moderate growth. That's just on mortgage for the year and its impact on the year.

I think HPHS will be steady growth through the year. Provider is starting to pick up, but I think the volume will pick up as we go to Q2 and then more growth in H2. U.K. BFS, I think, will be steady growth through the year. Collections, I think has started out strong. I'm cautiously optimistic that we'll start to see growth a little bit better from Q2 onwards rather than all towards the back-ended. But overall if I add up everything, the impact of mortgage and the growth in other sectors, Q1 will be flattish. It'll start to pick up in Q2, and then we'll see how we grow in Q3 and Q4 from a revenue perspective.

On EBIT, your instinct is absolutely right. This is a year of transition. We are replacing almost 10 points of our growth from mortgage with more steady, sticky revenues, right? So there's a 10% switch of our revenue switching from mortgage to the more profitable one. This will weigh heavy on the first half of the year as far as margins is concerned. But we expect that by end of the year, we'll start to come back to our current level.

So we expect to kind of get EBIT at about 11.5% to 12% by Q4. And then as we get to FY '24, we should be back to our normal guidance of keeping it that level and then starting the next phase of about 20-odd -- 20 to 25 basis points on that level. Does that answer your question, Dipesh?

[Dipesh Mehta, analyst]

Yes, it does answer. Now, just 2 questions. First about the topic on the top telecom account, which we have, how we should look at debt business growth? Because earlier you expected some supply side challenges. Now you're indicating, to some extent, we will find ways to mitigate it. But it -- I hear would be pleasant because offshoring is one of the way to take a lead. So considering all these moving items, how do you expect top line to perform for us?

[Vipul Khanna, executive]

Yes. So as I said, this year, so the year gone by, FY '22, we got sort of mid-single-digit growth. Next, after everything, supply side clients' movements to offshore, but also tested on new things from offshore. This kind of opens up new vistas. I think that will be an important growth driver. And then going into next year, at this point, we are forecasting we'll have similar sort of growth trajectory going into next year, FY '23.

I think -- the fact that the U.K. market is challenging, that is kind of forcing an element of reaching on the location slightly. We saw that in FY '22, I think. I'm again cautiously optimistic that we'll see more manifestations of that and open up more scope as far as different geographies is concerned.

And also, now with our digital becoming more real and chat especially becoming more acceptable as a mainstream option, not for just emerging companies, but for mainstream large banks, large sort of telecom and internet providers, I think chat will become an important driver for growth. And chat is very global, very offshore. So net-net, that's kind of the color. But we are confident about decent growth singles -- mid-single-digit growth from the large clients.

And lastly, if I could point out that a couple of years ago when we started, this account was about 20-odd percent of our revenue, but with other growth and yet delivering net growth in this account, this is now about less than 15% of the FSL revenue. So fairly good gains in terms of reducing the compensation risk from the large account.

[Dipesh Mehta, analyst]

Understood. And last question from my side. We have guided 7% to 10%. So if you can help us understand your assumption for low end and higher end. So upper end, lower end, what kind of assumption you've made? And how one should look the trajectory playing out? Will it give us confidence? We will be -- in the next couple of quarters, we will be closer to upper end than lower end?

[Vipul Khanna, executive]

Yes. So, obviously, this is what you see today. One big factor, as always, right, to have a range at the start of the year is the timing of pipeline closure, the timing of de-closure, sorry, and the timing of go-live, right, that's one factor which plays out [indiscernible] businesses. I think for now we have built a reasonable amount of intelligence in how the market, especially for providers and collections, evolve.

I think the other variable to think about is we obviously have 2 meaningful acquisitions which we are integrating and kind of taking those new offerings to our existing clients. As well as The StoneHill, they operate in the long tail of the mortgage market, right? We had positionally focused on the large clients. They're focused on the long tail. So it's about we understanding that market and taking some of the offerings to that market.

So that variable of cross-sell into each other's markets is the other variable that has gone into the 7% to 10% assumption that we have. I think the timing of some of the recovery in collections and providers has a bearing in terms of where we play on the upper end or the top end. And the mortgage decline acceleration has been reasonably intense leading up to February and March and into sort of April, May now.

We are kind of hoping that we start to see more structural demand emerge towards end of H2 with meaningful revenue. We're not counting a whole lot, but that would be the last factor which will play out there. That's how we see the 7% to 10%. Ankur, anything I'm missing on that?

[Ankur Maheshwari, executive]

No, no. That, I think, likely covers in terms of how we're seeing the [indiscernible] to play out.

[Operator]

The next question is from the line of Mihir Manohar from Carnelian Asset Advisors. Please go ahead.

[Mihir Manohar, analyst]

Yes. I wanted to understand that you guided for 7% to 10% kind of growth for FY '23. So I mean it is only the organic component or at the company level?

[Vipul Khanna, executive]

This is at the company level, but this is all organic as far as starting there is concerned. This 7% to 10% also includes the 6% impact -- full year impact from the acquisitions we did last year. But going forward, there is no acquisition baked into this growth assumption.

[Mihir Manohar, analyst]

Okay, so basically, this 7% to 10% guidance includes ARSI and StoneHill?

[Vipul Khanna, executive]

Yes.

[Dinesh Jain, executive]

That is a 6% impact.

[Mihir Manohar, analyst]

6% impact, okay. Understood, yes, sure. And I wanted to understand, on the delinquency side, I mean, we are seeing delinquency going up. So how do we see the collections part of the business? I mean how should we model that for this particular year across the quarters?

[Vipul Khanna, executive]

So FY '22 was kind of very muted, right? We had-- we were net flattish. We added new clients, but there were significant volume declines from existing clients, given the exceptional credit quality. And as I said, the delinquency ratios have started to pick up. The core card portfolio, obviously, there is a lagged impact. Spending is up. Now by the time people-- the payment starts to kind of fall behind and you start to see people going over the 90/180 days, it takes time to build that up when the portfolio [indiscernible] collection. That's just in the core card collections portfolio.

But I'm very encouraged by, one, the digital collections platform is really kind of establishing its leadership in the market, and we are taking it across segments. Fintechs has been rate-embracing. And I think the deals in there is resulting into revenue normal trajectory. Given they're a small base, they're not as much affected by the market trajectory. So we've seen good revenue booking and volumes in the fintech segment, and we've started to kind of mix them into the utility segment.

And then the legal collection has some of the books shot in the arm. I think [indiscernible] by our existing clients both ways. So compared to a flattish last year, we expect strong growth from collections this year across both our core collections as well as legal portfolio.

[Operator]

The next question is from the line of [ Sanjay Awatramani ] from Envision Capital.

[Unknown Analyst]

So just wanted some clarification that you have given, sir, of 7% to 10% of growth for FY '23 revenue growth. Is this understanding correct?

[Vipul Khanna, executive]

Yes.

[Unknown Analyst]

And EBIT margin of 11.5% to 12%?

[Vipul Khanna, executive]

No, 10.5% to 11%, yes.

[Unknown Analyst]

Okay, 10.5% to 11%. Okay. And sir, can you please help me with the attrition rate for Q4 and FY '22. And what are we-- I mean, a bit high. What are we taking-- what measures are we taking to curb that?

[Vipul Khanna, executive]

Sorry. Attrition, was your question?

[Unknown Analyst]

That's right, sir, attrition. What is the attrition rate for full year FY '22?

[Vipul Khanna, executive]

So we've given a lot of details in the investor pack. You know, we track it separately between onshore and offshore, right? Slightly different markets in how they behave and different talent market. What we saw in our onshore market, U.K. and U.S., attrition was high and then peaked in Q2, but it has started to come down from a peak of 60-plus percent, is now kind of close to mid-40s in Q4 for our U.S. and U.K. markets.

Offshore has picked up slightly. It's about 50% now. And it is 50% because for the last several quarters, given the COVID and work-from-home and sort of psychological safety, it was artificially low. It is starting to come up now. But net-net, for the year, we have ended at about 50% onshore and 46% offshore.

As we go into next year, I think we have a number of new actions in place with the rates corrections for the frontline staff, given high labor market in both U.S. and U.K. And our investments and leadership development engagement and making the work-from-home model work, I think they should have a positive impact on attrition. Clearly, I think most of us in the industry are shifting away from, "Hey, work-from-home is transitory now. What is the long-term model?"

And so a big chunk, a majority of the folks are still working from home. So I think this new reality and settling into that, even when COVID's impact is gone, is something that needs to play out, and we're working hard, like everybody else, to find [indiscernible]. But my sense is we should have better attrition next year despite the still very red hot markets, both U.S. and U.K.

[Unknown Analyst]

Okay, okay. This was very helpful. Just last one, if I can squeeze in. So just wanted to ask, I mean, if you have any acquisition plans in the -- for FY '23 or FY '24 and if you can quantify that. And if you can highlight the debt value in INR terms, if you can help me with that.

[Vipul Khanna, executive]

Sure. So look, acquisitions, as said that we have a systematic strategy of finding growth adjacencies in our core areas that we operate. In the last 18 months, we've done 3 acquisitions, all adding something to our existing businesses and in provider collections and mortgage. We continue to take that strategy forward. And I think, nothing specific to report, but the strategy of tuck-in acquisitions, paying largely out of cash flow, that I think will continue to FY '23 and '24.

We do think we have built an engine and the leadership team to be able to take on additional areas where we think there are opportunities. And we've built up our network of channels to kind of get good visibility on deals happening around the markets that we operate in. So nothing specific to report. Continuation of the same strategy, and you should continue to see small tuck-in opportunities come through.

[Operator]

The next question is from the line of [indiscernible]. Please go ahead.

[Unknown Analyst]

[indiscernible] circumstances in the mortgage market. Just want to understand what really is the impact of high inflation on our customers. On one hand, you mentioned little demand for our services. On the other hand, we see higher attrition and they need to pay up for staff, while most of my contracts are [indiscernible] contracts where we get the volume benefit. And volumes don't necessarily go up as net inflation does. So how do those 2 really work out [indiscernible] high inflation and balanced -- and shortages? What have you seen on the margin front in the past?

[Vipul Khanna, executive]

Yes. Great question. Look, inflation is real. And if you look at the frontline staff and those bases, the components of that basket of consumption are obviously particularly hit, right, food, fuel, energy prices, et cetera. So we have been very focused, proactive in making sure that we are increasing our hiring wage and we are adjusting it for existing employees. I think that has had -- these are stuff that we've done mostly in this quarter. I think that has had a positive impact. And it's kind of set the base now for the future hiring that's, hey, this is the increased hiring that you'll hire at in the future.

Now, obviously, a lot of our contracts have index-linked provisions, either linked through minimum wage or living wage in the U.K. So those are automatic. But given the more broader inflation, for most of our key clients, we've initiated dialogue. We've gotten good direction, even approval from a couple of large clients for higher than normal rate hikes. Not necessarily all from today, but sort of from -- down from the future. And other clients have shown openers that when the contracts come up for the annual -- anniversary cycle, at that time, they will consider sort of gain. So it's kind of bespoke arrangements with often the big ones on there.

The other way to think about is that talent shortage is real for everyone, right, where -- or even for in-house operations for our clients. If you think of provider business, it has to be a talent situation. Healthcare broadly is facing the same challenge. Health plan is facing the same challenge in the U.S.

What is good is that it is creating demand for offshore and openness to offshore. So Mexico has gone live. And now we have active conversations from other clients to say, yes, Mexico is a viable option. Philippines demand is becoming more real. And then, obviously, there is India. And then the move to chat to say, how much can I devote to chat and I'm more comfortable taking chat offshore than I was taking -- sorry, called offshore.

So nearshore and offshore and chat -- channel migration are the most structural options to take care for that. This year, net-net, as I pointed out, from a margin standpoint, it will have some downward pressure. That's why we've guided to somewhat lower margin for this year. And as recoveries [indiscernible] play out, we should see margins come back to 11.5% to 12% by the end of the year. Is there something else to add on the inflation and client recovery?

[Dinesh Jain, executive]

No, I think, I think very well...

[Unknown Analyst]

Understood. And just post-FY '23, what do you see for longer-term growth trajectory possible within the Healthcare business, both on the clients and provider business [indiscernible]? And the most visible [indiscernible] for turnaround is what we have achieved [indiscernible] over the last 2 years? But how much further is there to go? Could you see this -- both these businesses [indiscernible], given the large amount of talent we want [indiscernible]?

[Vipul Khanna, executive]

Your voice is a little breaking, but I think I got a sense, the question you're asking is, what is the longer-term growth trajectory of the business?

[Unknown Analyst]

Yes.

[Vipul Khanna, executive]

Yes? Yes, okay. So take 2 parts. Obviously, we have been rebuilding our HPHS health plan and health services business the last 2 years. I think it's done fantastically well, both quantitatively and qualitatively. In terms of the size, it has doubled from what it was on a run rate basis, as I said, Q4 '20 to Q4 '22. We've put in 3 or 4 strategies for growth in that area. 2 of them are traditional established areas, traditional BPO, claims processing, et cetera, et cetera.

But two more technology-driven BPaaS -- bespoke BPaaS for [ head ] market as well as digital intake for pretty much everyone. Those are still, I think, in the early days, and we see a lot of growth trajectory for digital intake as well as for BPaaS. And I think, given the size of that market, I'm confident that we can continue our growth trajectory in HPHS that we've seen in the last 2 years. At least for the next few years, we can see that continuing, right? And keep in mind, this has been all organic.

The provider business, where we play in narrower segments of the market, we are leaders, but narrower segments, that has been muted last 2 years. As I said, this quarter was one of the best from a sales standpoint, the best we've seen in the last 2 years. What we're also doing is we're expanding the scope of what we play. And again, offshoring comes into play. We are developing new offerings, which kind of are more -- clients are more [indiscernible] from an offshore standpoint, given the talent situation.

So, from a normal growth recovery as well as increasing the scope of where we play, I'm cautiously optimistic that providers will have healthy growth this year, and as we get into next year, it should start to build on that momentum. So the net-net, FY '23 and '24, we should definitely see at least company average or maybe slightly higher than company average growth in the overall [indiscernible] segment.

[Operator]

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

[Shradha Agrawal, analyst]

Yes. Congratulations for [indiscernible] that you expect mortgage revenues [indiscernible]...

[Operator]

Ma'am, sorry to interrupt, but your voice is breaking up in between. May we request you to move to a better reception area, please?

[Shradha Agrawal, analyst]

Yes. Is it better now?

[Operator]

Yes, ma'am. Please proceed.

[Shradha Agrawal, analyst]

So I was saying now you didn't say that you expect declining market revenue in 1Q. So from the current run rate of $46 million, $47 million that you bring in market, what is the kind of decline that we should build into our model for 1Q?

[Vipul Khanna, executive]

So Shradha, as we said, we gave a lot of detail. At a full year basis, right now, we have modeled mortgage at between $125 million to $135-ish million for the full year. Of that, we expect about 2/3 will come from servicing, and the remaining will come from origination, right?

And this is a very different composition from what we have had in the past, right? It's kind of almost inverse of what we had in the past. So our runways for Q4 in mortgage was about sort of $45 million -- $44 million to $45 million. I think it would be [indiscernible] $45 million. But as we get into the next 2 quarters, we expect that it will be more in the range of $30 million to $33-odd million dollars.

[Shradha Agrawal, analyst]

Okay. $30 million to $35 million?

[Vipul Khanna, executive]

$30 million to $33-ish million.

[Shradha Agrawal, analyst]

Okay, okay. And another thing is you did indicate about the growth trajectory of the company in the Healthcare segment in particular. But beyond FY '23, how should we look at Firstsource as a composite company in terms of growth rate? Earlier you used to have this aspiration of being in the top quartile growth rate vis-à-vis peers in the retail industry. So how should we look at medium-term aspiration for us now going beyond FY '22?

[Vipul Khanna, executive]

Sure. Shradha, even for FY '22, we bottomed to 14.7%. Next year, we think 7% to 10%. But if you exclude out for the transition of revenue from mortgage, as I said, it will be about 18% to 22%, which reflects the most diversified business even from FY '22.

So if you take that forward and take it to FY '24 and '25, I am very confident of returning back to that aspiration even at the net growth level, right, breaking out all the uncertainty. And at this stage, very confident that we come back to that top quartile, low double-digit [ permitting ] kind of growth at a company level.

We have talked about our established businesses. We are also, obviously, incubating newer businesses that haven't been in the past. Those are something that will take a while, but I think we are building those growth waves for the future as well to supplement the existing businesses of BFS, CMT and healthcare as well. So yes, back to the core question, we -- FY '24 and FY '25, I'm confident that we'll come back to that aspiration.

[Shradha Agrawal, analyst]

Right. That's helpful. And just one number-related question. What should be the CapEx number for '23, and what is the pending payout on the acquisitions and the mortgage client payout for '23?

[Vipul Khanna, executive]

Yes. Sorry, your question was CapEx, and pending payout for acquisitions and the mortgage minority buyout, yes?

[Shradha Agrawal, analyst]

Yes.

[Vipul Khanna, executive]

Yes. Dinesh, do you want to take that?

[Dinesh Jain, executive]

Okay. We've built in around $8 million to $9 million because I think, as of today, plan is a more of a technology side CapEx, which is going to take place. So that has been baked in there. And on the acquisition side, Ankur, do you have the number readily?

[Ankur Maheshwari, executive]

Yes. So Shradha, on the acquisitions, the numbers are contingent on performance with On/Offs. So assuming if we target with businesses performing to full potential, the payout could be in the range of about $12-odd million. And regarding the mortgage deals that we had signed, again, contingent on certain outcomes. And that would also, I think, be -- I think in the range of around $5 million to $10 million, depending upon where the performance is lying there.

[Shradha Agrawal, analyst]

This $2 million is combined on both the acquisitions?

[Dinesh Jain, executive]

$12 million. 1-2, yes.

[Shradha Agrawal, analyst]

Sorry, it would be $12 million. Okay. And mortgage is $5 million to $10 million?

[Vipul Khanna, executive]

Yes.

[Operator]

As there are no further questions, I now hand the conference over to the management for closing comments.

[Vipul Khanna, executive]

Thank you. Again, thank you, everyone, for joining late in the day. It's been interesting 2 quarters. I'm looking forward to more steadier and uneventful '23 and come back and talk to you about [indiscernible]. Thank you again for joining and your interest in us.

[Dinesh Jain, executive]

Thank you, everyone.

[Operator]

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.