Analyst Research Report Snapshot

Title:

Spark Capital: Firstsource: CESC to acquire majority stake via preferential issue; Downgrade to Sell

Price:

$23.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

26 Oct 2012

Pages:

3

Type:

AcrobatPDF

Companies referenced:

FISO.NS

Available for Immediate Download
Summary:

Firstsource (FSL) entered into an agreement to allot 226.9mn shares to CESC on preferential basis at Rs. 12.1 per share and also acquire 15% of post preferential issue share capital from ICICI Bank, Metavante and Aranda investment. Further CESC would be making an open offer for 198.4mn shares at Rs. 12.1. The preferential allotment would infuse Rs. 2.75 bn of cash into FSL and would alleviate partially the cash required for FCCB repayment. However we note that there still would be gap of US$ 50mn. Downgrade from Reduce to Sell with a price target of Rs. 10 owing to high equity dilution. The Deal: CESC through its wholly owned subsidiary Spen Liq private limited is subscribing to 226.9mn shares of FSL on a preferential basis at Rs. 12.1 per share. The fresh issue would infuse Rs. 2.75bn cash into the company. Further, CESC will acquire 15% of post preferential issue share capital from ICICI Bank, Metavante and Aranda investment and follow it with an open offer for 198.4mn shares at Rs. 12.1. In the event of open offer being fully subscribed, CESC will own 80.6% of the expanded capital base excluding dilution from FCCB and ESOPs. High leverage would continue: The deal infuses Rs. 2.75 bn into FSL and partially addresses the gap in the FCCB repayment. We estimate requirement for another US$ 50mn of capital to completely repay FCCB. The requirement would change with INR/ US$ exchange rate. FSL has hedged only US$ 75 mn of the repayment at Rs. 55.7/US$ and the remaining US$ 162 is open to forex risk. We expect Net Debt of US$ 205mn post the FCCB repayment (assumed exchange rate of Rs. 53/US$). Further, the term loan repayment would begin from Oct-13 and FSL would be required to pay US$ 11.25mn per quarter for 16 quarters. Our estimates suggest FSL would not generate adequate free cash to repay the term loan on a continuous basis. Downgrade to Sell: Over the last one month FSL stock has rallied ~50% on the back of a speculation of a deal. We believe the debt overhang to continue and substantial equity dilution reduces our EPS estimates. We downgrade FY14E EPS by 28% owing to equity dilution. We maintain our preference for valuing FSL on EV/EBITDA and attach a multiple of 6x on FY14E EBITDA to arrive at our price target of Rs. 10. Downgrade from Reduce to Sell.

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