CESC backing opens more opportunities for us: Firstsource CEO
Goutam Das October 30, 2012Last week, the RP-Sanjiv Goenka group's power utility CESC announced it would buy a 49.5 per cent stake in Indian BPO Firstsource for Rs 400 crore. The news did not go down well with equity and market analysts, who were stumped by the company's diversification into an unrelated business. Pradeep Mukherji of Los Angeles-based IT-BPO advisory Avasant says he would have preferred to see Harsh Goenka's (Sanjiv Goenka's elder brother) RPG Enterprises pick up a stake in Firstsource since it already has an IT company in Pune-based Zensar Technologies.
On October 26, a day after the deal was announced, CESC's stock plummeted 15 per cent on the BSE. The scrip dipped another 0.57 per cent on Monday, October 29, to end at Rs 279.55. However, Firstsource Managing Director and CEO Rajesh Subramaniam told Goutam Das that all concerns would fade once the return on investment starts kicking in.
How will Firstsource benefit from CESC's buying a stake?
We have a very strong promoter. I think we have a group that has a solid foundation in creating long lasting businesses. They have done several acquisitions in the past and have made a success of them. They are backing our management team. So, there is no disruption in our team and there is complete continuity in the way we operate our business.
It also opens up more doors for us to go after opportunities. Earlier, we were constrained because we were very focused on conserving cash to ensure that we repaid our debt. The group has very large investment plans. I am sure we will be able to exhibit growth rates far superior to the past.
Investors have not taken the deal very positively if you look at the slide in stock price. Do you have any comments on that?
I think it is a temporary phenomenon - the market thinks it is an unrelated diversification. But over time, as the return of investment in Firstsource starts showing results, it will correct itself.
Growth in the BPO world is tepid compared to what it used to be three years ago. Considering this, CESC's acquisition looks a bit surprising…
Growth of 10-12 per cent is there. But the BPO industry is by no measure a mature industry where growth rates will plateau out at the 10-12 per cent level. Nasscom projections are for 11-14 per cent growth.
There are a lot of transformational deals. We are playing in healthcare, where we can drive a far superior level of growth given some of the reform mandates playing out. It would require a certain level of investment. I believe that with the right kind of investment in our target verticals and horizontals, we can have superior growth. Will it play out in the next six months? No. Will it play out in 18 months? Yes.
What is your sense of the current business environment?
There are three verticals we operate in - healthcare, telecom, and banking, financial services and insurance (BFSI). The outlook in healthcare is very encouraging. We see growth rates that are attractive both on the provider side (hospitals) and on the payer side (insurance companies). More so on the payer side, a little less on the provider side - but it will gain momentum after the U.S. elections.
In telecom, which sits in my customer management and collections business, we are seeing significant traction with existing customers. And we are seeing a pipeline built on new customers. This will be the strongest growth driver for us over the next couple of years.
A significant portion of my revenue is in BFSI and it comes from the collections business. It is seeing a cyclical downturn given the deleveraging of the American economy. While we are seeing the first signs of an uptake - the first signs of credit card inventory building up - we are cautiously optimistic that the worst is behind us. But we are still watching that space and ensuring that our cost structures are aligned to the realities of the business. While the money we make is muted compared to the past, at least we end up making money.
What happens to the healthcare business if Barack Obama is not re-elected as president of the US?
I don't want to speculate. Irrespective of whether it is a Republican or a Democrat president, right now there are certain actions that are playing out on the payer side linked to system conversion and standardisation. This will see my payer business grow anywhere between 15-20 per cent.
On the provider side, there are significant opportunities in the way providers integrate with the payers. These are all linked to technology investments. Healthcare reforms per se drive a certain mandate. However, I think people are realising that irrespective of whether reforms happen or not, there is a need to ensure a certain level of robustness in their systems.
Our strongest point is that we work with 800-plus hospitals. We have long tenured relationships. For me, that's a big opportunity to drive growth going forward.