Why Firstsource is Going Slim
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Image: Dinesh Krishnan
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SOURCE OF TROUBLE: Ananda Mukerji says that profit margins fell because of slowdown and currency fluctuations and not due to acquisition
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n mid 2007, Ananda Mukerji was meeting K.V. Kamath, the ICICI group doyen who had handpicked him as CEO of Firstsource Solutions six years earlier. As he had often done, Mukerji was seeking Kamath’s advice on an important decision to be taken at India’s sixth largest business process outsourcing firm.
Mukerji was planning a big acquisition. He was already in talks with two targets: Citigroup’s captive back office operations and MedAssist, a US-based healthcare outsourcing company. The Citi unit’s asking price was said to be about $800 million and MedAssist’s was about half of that. The story goes that when Mukerji asked Kamath which company he should acquire, Kamath replied “why don’t you buy both?” The twin acquisitions would have cost Firstsource six or seven times the company’s then revenues of $180 million a year.
Well, this is the market talk and Mukerji refuses to say whether such a meeting ever took place. But he says the board would not have allowed him to take on two large acquisitions at the same time. In any case, the purported conversation captures the DNA of Firstsource, which is the same as that of ICICI Bank. Firstsource was extremely hard-charging and embraced acquisitions for growth. Started in 2000 with $40-million from ICICI, Firstsource acquired seven companies in just five years, spending about $450 million in all.
If one were to look just at the revenues, Firstsource’s strategy would seem to have paid off. They grew from a mere $16 million 2002-03 to $372 million in the year ended March 2009. But the subtext lies in profitability. Operating profit margins have fallen from 12.2 percent to just 8 percent in the last two years. A strategic deal with the US technology company Metavante has not paid off. Despite having a banking pedigree, Firstsource does not have a strong presence among financial sector clients.
People close to the company say ICICI Bank, which owns 26 percent of the company, now wants out. Mukerji is under pressure to show that the money paid for MedAssist had been well spent. The February 2007 IPO of Firstsource, which saw the issue being oversubscribed nearly 50 times, is a forgotten memory. The stock is trading at less than half of its IPO price of Rs. 64, having gone as low as Rs. 9.80 at one point in January 2009.
Competitors say that Firstsource lacks a clear strategy and that most of its problems are the result of acquisitions that were not integrated well. Mukerji denies it and says the companies he acquired brought in new skills. He says he has scaled up the businesses that he acquired by 3.6 times. Customer accounts like BSkyB, Verizon and United Healthcare which came through acquisitions and were small then, have today grown into multi-million dollar businesses.
Mukerji says his acquisition-led strategy was born out of necessity. When Kamath asked him to set up ICICI Onesource (As Firstsource was then called), he didn’t have any large anchor client to help start the business like competitors Genpact or WNS did. “Being a new entrant, we had to acquire skills and expertise to get into the business,” says Chairman Ashok Ganguly.
Mukerji says that margins have fallen last year not because of acquisitions but due to other factors like a slowdown in some of his key businesses, currency fluctuations as well as timing of some big investments. A tenth of the company’s revenues come from credit card collections and increased job losses in the
US have led to higher delinquencies which have brought down operating profits in this business from 20 percent to almost nil. Then there is the timing. Two years ago, Mukerji took a bet on developing the India business unit. During 2007-2009, Firstsource has invested close to Rs. 100 crore in setting up 14 new delivery centres for catering to Indian clients. The domestic business operates at a much lower margin currently and is still in an investment phase.
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