Reduce Firstsource Solutions Ltd For Target Rs. 370 By Emkay Global Financial Services Ltd
Strong FY25; upside hinges on further acceleration
FSOL’s FY25 annual report provided progress made on the growth strategy encompassing the ‘One Firstsource’ framework, with focus on seven strategic levers, including organizational structure simplification and expanding multitower relationships with cross-selling/up-selling in potential growth accounts. Consistent execution of this framework, coupled with initial traction in the UnBPO approach, instills confidence in the management to sustain revenue growth momentum. The management targets expanding the margin by 50- 75bps annually. FSOL has given FY26 revenue growth guidance of 12-15% (incl ~3% inorganic contribution), and EBITM guidance of 11.25-12%. Other key takeaways from the AR: i) net debt grew over 2x in FY25, ii) OCF/EBITDA conversion weakened to 58%, iii) dividend payout is stable at 47%, iv) steady progress across client buckets and added 43 new logos (BFSI: 18; Healthcare: 16; CMT: 8, Diverse: 1), including 12 strategic logos, v) won 14 large deals, including 5 from new logos; combined ACV of deal wins in FY25 was up 60% YoY and the exit deal pipeline was 30% higher on YoY basis, vi) launched relAI, a suite of Gen AI-led offerings, solutions, and platforms, to drive digital transformation of clients. We retain REDUCE, given the rich valuations, with TP of Rs370 at 25x Jun-27E EPS.
Unwinding FY25
The management defined FY25 as a year of: i) industry dominance (gained almost 0.5% of market share against the group of 15 closest global listed peers, based on TTM revenue); ii) bold thinking (UnBPO approach improved visibility); iii) pivot to AI (launched relAI, a suite of AI-led offerings, solutions, and platforms, to drive digital transformation of clients in a responsible manner); iv) expanding footprint (expanded operations in Australia with an onshore delivery center and a dedicated AI Innovation Lab in Melbourne; the Ascensos acquisition expanded its delivery footprint to South Africa, Romania, and Trinidad and Tobago, with capabilities to provide customer support in 11 languages); and v) being prudent while investing for growth (flattish EBITM in FY25).
Reinventing the operating model through UnBPO
FSOL launched its bold new approach UnBPO – a transformative shift away from traditional outsourcing models. With the UnBPO approach, the company is moving beyond labor arbitrage to technology arbitrage – using AI, automation, and expert talent to get the right work done by the right resource, faster and smarter. UnBPO is a company’s blueprint for the future of work. The key tenets of UnBPO: i) Traditional commercial models must give way to non-linear, outcome-driven frameworks — where service behaves like software. ii) Cost arbitrage is baseline. The edge now lies in technology?led leverage, where deep domain expertise, AI integration, and hyperspecialization drive differentiation and sustained advantage iii) AI Centers of Excellence and smart partnerships will define future delivery models. Location debt must be replaced by strategic orchestration of talent, tools, and alliances. iv) The workforce is being reshaped by whom the company hires, how it assigns work, and what skills matter. Hierarchies must give way to fluid roles, personalized skilling, and collaborative impact. In alignment with the UnBPO principle of ‘Inch Wide, Mile Deep’, the company has identified problem areas and developed solutions with its deep domain knowledge, eg a) for ISA (Individual Savings Account) transfers, it has developed a prototype leveraging Agentic AI; b) in the Economic Crime space, it has begun with process intelligence initiatives to map operational pain points and identify opportunities where AI can significantly reduce false positives in alert disposition; c) in Edtech, understanding test-taker personas and user journeys to build AI first solutions for support and adjacent areas such as remote proctoring and test analysis; d) speech analytics and automated QA to help Utility companies better understand customer sentiment, give prudent response to new products and tariffs, identify vulnerability and challenges with the ability to pay, and reduce field service costs through self-service enablement.
Steadfast execution on seven strategic initiatives to sustain growth momentum
The company has made steady progress on its growth strategy under the ‘One Firstsource’ framework across seven key initiatives:
* Simplify organizational and realign leadership: Strengthened its leadership across critical functions, with 50% expansion in the sales team in FY25. Leadership realignment also included enhancements in solution design, technology, and delivery.
* Embed technology across the value chain: Launched relAI, a suite of GenAI-powered offerings aimed at responsible, full-cycle transformation. It is also investing in developing a domain-specific language model for mortgage services, to significantly reduce loan processing timelines.
* Institutionalize cross-sell and upsell: Number of clients contributing over USD1mn, USD5mn, and USD10mn in annual revenue rose by 13, five, and two, respectively, in FY25, indicating the successful institutionalization of cross-sell and upsell strategies.
* Expand capabilities: The company has realigned the portfolio around high-growth adjacencies. The Collections business has expanded into fintech, BNPL, and personal finance, and the company has begun cross-selling collections into the non-BFS verticals such as healthcare and utilities. The Ascensos acquisition enhanced the company’s nearshore delivery capabilities, multilingual support, and retail vertical strength. In addition, the company has expanded its presence to Australia.
* Amplify the Firstsource brand: Invested in brand building among analysts, clients, and prospects. Its newly formed Advisory Board, comprising senior industry veterans, has been instrumental in amplifying its voice in the market.
* Elevate employee experience: Launched initiatives to enhance hiring, training, and internal mobility. It also launched FirstALUM, a platform to engage alumni network and unlock new opportunities for collaboration.
* Drive margin expansion: It identified 37 margin levers – from offshoring to delivery consolidation; it has also set a medium-term target of improving margins by 50-75bps annually, with an ambition toward achieving mid-teen profitability.
Revenue growth accelerated in FY25 partly aided by M&As
FSOL’s growth strategy encompassing the ‘One Firstsource’ framework with focus on seven strategic levers has started yielding early results, as reflected in the revenue growth acceleration, deal intake and deal pipeline, progress across client buckets, and quality of the ‘new logos’ addition. FSOL delivered strong revenue growth in FY25 on the back of broadbased growth across the CMT, Healthcare, BFS, and Diverse industries. M&As (Ascensos, QBSS, AccunAI) contributed ~7% to revenue growth. Improved growth momentum has helped the company gain almost 0.5% market share over the last four quarters as against the basket of 15 of its closest global publicly traded peers, based on trailing 4 quarters reported revenue. BFS added 18 new logos in FY25, and its revenue grew 7% CC YoY. The company introduced new services offerings around financial crimes and compliance and expanded into building the societies market in the UK. Healthcare added 16 new logos in FY25, and its revenue grew 30% YoY. The QBSS acquisition strengthened its revenue cycle This report is intended for Team White Marque Solutions (team.emkay@whitemarquesolutions.com) use and downloaded amanagement (RCM) portfolio. CMT added 8 new logos in FY25, and its revenue grew 16% CC YoY. Diverse industries added 1 new logo in FY25 and their revenue grew 118%. FSOL added the Retail vertical to its portfolio through the Ascensos acquisition in FY25. The Ascensos acquisition in turn added 5% of revenue in FY25. Overall, the company added 43 new logos in FY25 which included 12 strategic logos (defined as potential for at least a >USD5mn relationship). It won 14 large deals (‘large’ defined as a deal with ACV of over USD5mn) in FY25, including five from new logos. The combined ACV of deal wins in FY25 was up >60% YoY, and the FY25 exit deal pipeline was higher by >30% YoY.
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