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Firstsource Solutions Ltd.
Telecom still weak; Valuation
led Buy
Telecom still weak; Valuation led Buy
Q4 was a seasonally strong quarter, modestly above our estimates and driven by
the collections business. Recovery in telecom (~34% of revs) is likely to be backended
on impact from a client ramp down in H1 and new deal closures expected
only around H2. A modest financial outlook for FY12 already appears priced into
the stock which is currently trading at 40-50% discount to most mid-tier IT
vendors. We lower FY12/13 by 5% and PO to Rs26 but retain Buy. Key risks:
Attrition remaining at high levels and further delays in closure of telecom deals.
Recovery in telecom towards H2
In comparison with our earlier expectation of recovery in telecom from early in the
year, ramp-down of business from an existing client during H1 will push the
recovery to H2. Ramp-down in the client is on account of shift of business from
Firstsource to in-house team. Company, however, remains confident of reversing
the losses in H2 from growth with another existing telecom client and also
conversion of few late-stage deals in the pipeline.
4Q: Seasonally strong quarter
Seasonal strength in collections (~10% of revs) and full qtr contribution of
Barclayscard deal led to a 6% qoq rev growth (1% ahead of BofAMLe). EBIT
margins expanded 90bps qoq, in-line with our estimates and on operating
leverage from better volumes. PAT missed our estimates by 3% on lower forex
gains.
Beaten down valuations
We believe stock’s current valuation of 7xFY12E adj. EPS fully prices in the
recent loss in rev momentum. Our adj EPS imputing interest on FCCB is Rs2.8
(FY12) and Rs 3.3(FY13). We forecast FY11-13 CAGR of 13% for EBITDA and
17% for adj. EPS. Balance sheet concerns have also abated over past 2 quarters
as strong cash generation has improved visibility on company’s target of meeting
50% of its FCCB obligations through internal accruals.
Price objective basis & risk
Firstsource (FSSOF)
Our PO of Rs 26 is based on 0.5x EV/EBITDA to 2-yr growth, implying 9.4xFY12
adjusted EPS. Our adjusted EPS imputes interest on FCCB, given we treat FCCB
as debt. The multiple is fair given our forecast of 17% 2-yr CAGR in adj. EPS.
Downside risks: Sharp macro detrioration and recovery delays in telecom vertical.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Firstsource Solutions Ltd.
Telecom still weak; Valuation
led Buy
Telecom still weak; Valuation led Buy
Q4 was a seasonally strong quarter, modestly above our estimates and driven by
the collections business. Recovery in telecom (~34% of revs) is likely to be backended
on impact from a client ramp down in H1 and new deal closures expected
only around H2. A modest financial outlook for FY12 already appears priced into
the stock which is currently trading at 40-50% discount to most mid-tier IT
vendors. We lower FY12/13 by 5% and PO to Rs26 but retain Buy. Key risks:
Attrition remaining at high levels and further delays in closure of telecom deals.
Recovery in telecom towards H2
In comparison with our earlier expectation of recovery in telecom from early in the
year, ramp-down of business from an existing client during H1 will push the
recovery to H2. Ramp-down in the client is on account of shift of business from
Firstsource to in-house team. Company, however, remains confident of reversing
the losses in H2 from growth with another existing telecom client and also
conversion of few late-stage deals in the pipeline.
4Q: Seasonally strong quarter
Seasonal strength in collections (~10% of revs) and full qtr contribution of
Barclayscard deal led to a 6% qoq rev growth (1% ahead of BofAMLe). EBIT
margins expanded 90bps qoq, in-line with our estimates and on operating
leverage from better volumes. PAT missed our estimates by 3% on lower forex
gains.
Beaten down valuations
We believe stock’s current valuation of 7xFY12E adj. EPS fully prices in the
recent loss in rev momentum. Our adj EPS imputing interest on FCCB is Rs2.8
(FY12) and Rs 3.3(FY13). We forecast FY11-13 CAGR of 13% for EBITDA and
17% for adj. EPS. Balance sheet concerns have also abated over past 2 quarters
as strong cash generation has improved visibility on company’s target of meeting
50% of its FCCB obligations through internal accruals.
Price objective basis & risk
Firstsource (FSSOF)
Our PO of Rs 26 is based on 0.5x EV/EBITDA to 2-yr growth, implying 9.4xFY12
adjusted EPS. Our adjusted EPS imputes interest on FCCB, given we treat FCCB
as debt. The multiple is fair given our forecast of 17% 2-yr CAGR in adj. EPS.
Downside risks: Sharp macro detrioration and recovery delays in telecom vertical.
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