Growth shifts to FY16E… • Firstsource :: ICICI Securities, link

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Firstsource Solutions - Initiating Coverage - Overseas growth opportunities could surprise positively:: Centrum

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Rating: Buy; Target Price: Rs52; CMP: Rs41.3; Upside: 26.7%



Overseas growth opportunities could surprise positively



We initiate coverage on Firstsource with a Buy rating and a TP of Rs52
based on 9x Sep-16E EPS. While revenue growth has been unimpressive at
first glance, growth potential is masked as growth in overseas
business was countered by an exit from unprofitable domestic accounts.
We expect this trend to continue over FY15E/FY16E along with
operational improvements that help bring further margin expansion. We
think our revenue growth estimates could prove conservative if
Firstsource gains traction in the Healthcare segment that has
significant potential. If healthcare does grow significantly, we think
margins could also improve ahead of current estimates with scale gains
in Philippines.

$ Margin expansion from cost management and international revenue
growth: Though employee costs put pressure on margins by 104bps over
FY12-FY14, prudent cost containment in other areas such as
Connectivity charges, Rent, Repairs and Maintenance, Traveling &
Conveyance helped deliver a credible EBITDA margin improvement of
345bps. While some of the cost savings came from the decision to
purchase a leased facility in the US, other cost savings reflect a
change in attitude towards cost management and we believe that further
cost savings are likely over FY15E and FY16E. We think that cost
savings have also come from increasing onsite seat utilisation and
that there is still some headroom left.

$ Revenue growth has potential ahead of current expectations: While
overall revenue growth over FY14 was affected by exits from
unprofitable domestic accounts, international revenue saw excellent
growth over FY13. Despite headwinds such as softness in the
collections business and the decision of a US banking client to
in-source some operations, the international business has shown a YoY
growth of 3.9% over 1QFY15. With deal ramp-ups expected this October,
we expect seat utilisation to improve in the near-term from the recent
low of 73.4% in 1QFY15, but we do not expect significant capex for
additional seats as our conservative revenue growth projections assume
only a high of 80% seat fill factor (in 3QFY17). We think our current
revenue estimates are conservative.

$ Growing US revenues and gaining scale in Philippines offer
opportunities: We note that Firstsource’s international revenue growth
was driven mostly by UK with the US contributing little even after
MedAssist acquisition. With the industry moving away from
voice-centred operations for customer management to a multi-channel
approach that combines chat, e-mail and self-service, Firstsource’s
lack of scale in Philippines is less of a handicap. But with
Philippines growing faster than India as a fulfilment center for North
America, and also being a proven destination for clinical process
outsourcing with a large pool of US-certified nurses, increasing
presence here would help long-term growth prospects in the US.

$ Valuation and key risks: We initiate coverage with a Buy
recommendation and a TP of Rs52 based on 9x Sep-16E EPS. With an
expected PAT CAGR of 28.3% over FY14-FY17E, we think Firstsource is an
attractive investment at current levels. Much of the profit growth is
expected to come from margin expansion and lower interest cost burden.
While we think that our revenue assumptions could prove conservative,
we await results of the recent focus on growing the international
customer management and healthcare segments. With long sales cycles,
we may need to wait till FY16E to see any significant uptick in growth
trajectory. Key downside risks include loss of key clients, continued
slowness in the collections business and significant rupee
appreciation.



Thanks & Regards

--



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Query Corner:: Omaxe, Unitech, Amara Raja Batteries, Firstsource Solutions, Orient Paper, JSW Energy: Business Line

52-WEEK FLOP: FIRSTSOURCE SOLUTIONS :: Business Line

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Firstsource Solutions, a BPO player, has been facing a turbulent 12-18 months as it grapples with anaemic growth in key financials.

In FY11, both revenues and profits had low single digit growth over the previous fiscal.

In the first half of FY12, revenues rose just 6.2 per cent compared to the same period last year, while net profits more than halved to Rs 32.1 crore.

The company derives its revenue from three segments — BFSI, telecom and media and healthcare, with each of these verticals contributing 30-35 per cent to the overall pie.

Firstsource has been facing a decline in revenues from telecom and media as well as healthcare.

The company also has large amounts of debt to be serviced. As of September 2011, Firstsource has secured and unsecured loans to the tune of Rs 2,086.6 crore in its books.

Employee costs too have been increasing steadily for the company, with the first half of this fiscal seeing a 14.5 per cent rise in personnel expenses over the same period in the previous year. This may be attributed to the fact that it has a high-cost structure as 24.5 per cent of its workforce is based outside India. This adds to the pressure on margins.

Attrition too is extremely high at over 40 per cent across geographies, posing execution challenges.

Firstsource Solutions- Telecom still weak; Valuation led Buy 􀂄 BofA Merrill Lynch,

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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.

Firstsource Solutions- report by Motilal Oswal

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Firstsource is a leading global provider of business process outsourcing (BPO) services
offering a wide range of services across banking and financial services, telecommunications
and media and the healthcare industry.

Firstsource Solutions -Valuation in favor; Buy - BofA ML

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Firstsource Solutions Ltd.
Valuation in favor; Retain Buy
􀂄 Cut PO on delays in vol ramp; Retain Buy on valn comfort
Q2 operating profits for Firstsource grew 5% qoq (2% ahead of our estimates)
helped by improvement in Asia business unit. However, delays in volume ramp
from existing telecom clients moderate our sharp rev growth expectations for H2.
We cut our FY11-13 earnings estimates by 7-9% to factor the delay and
incorporate sale of Pipal (51% subsidiary). Lower PO to Rs35 at 0.5xEV/EBITDA
to 2-yr growth, implying 10x FY12 adj EPS but retain Buy on valuation comfort.
More deal wins like the recent Barclays deal are critical for sustained
improvement, in our view.
Q2: in-line, modest quarter
Revs grew 3% qoq while EBIT margins expanded 25bps sequentially as Asia
business unit nears breakeven helped by recent win in banking vertical. Co.
signed an agreement to sell its 51% stake in Pipal (a research service provider).
Attrition rates remain high while DSO & unbilled days increased in the quarter due
to client specific situation. This has already been reversed by the company.
Ramp delays in telecom moderate H2 growth trajectory
We moderate our rev growth forecast for H2 over H1 to 8% (vs. 14% earlier) as
vol ramps expected from vendor consolidation in the telecom vertical are delayed.
Normalizing may take up to 2/3 qrtrs. In fact, slow pipeline conversion / transitions
have been reported across BPO sector given short term return focus of clients.
Pipeline adds remain strong
Additions to deal pipeline remains robust with the pipeline having grown in quarter
despite the large deal conversions. Healthcare remains a strong medium term
opportunity for the company on the back of recent healthcare reforms in US. We
think the pipeline in telecom is also attractive but closures remain the key issue.