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Spark Capital: Firstsource 3QFY13 results update




Spark Capital Advisors(India) Private Limited


20 Feb 2013





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Firstsource: Start of a turn around; Retain Reduce Firstsource reported steady 3Q results with strong yoy revenue growth and margin expansion. More importantly over the last three quarters FSL has addressed the twin overhang of FCCB repayment and shareholder issues. Improvement in operational performance and sustained reduction in debt is important for FSL. We believe FSL is in the midst of turnaround and believe more evidence of it would make us constructive on the stock. We retain our Reduce rating with an increased price target of Rs. 11.20. Strong operational performance: Revenues at Rs. 7.2bn up 24% yoy with EBITDA margins increasing 270bps yoy. Telecom and Media continues to drive revenue growth with yoy growth of 48% with FSL winning multiple deals within the existing client base. Margin expansion was predominantly from other operating expenditure dropping by 220bps yoy. 4Q is seasonally strong quarter and management is confident of sequential growth in revenues and margins Balance sheet cleanup: Repayment of FCCB and large shareholder’s looking to sell their stake was tow over hang on FSL. Over the last six month both the issues have been addressed. FCCB was repaid in full and promoter changed from ICICI Bank to CESC. Net Debt stands at US$ 215mn, a Net Debt / EBITDA of 4.1x on FY13E EBITDA. The repayment of loans would start from Jul-13 and would be in quarterly rests of US$ 11.25mn each quarter. Management is confident of generating cash to repay both debt and interest without any incremental capital raise. Healthcare segment would be growth driver: Healthcare segment accounts for 31% of revenues and with certainty of Healthcare bill we expect this segment to be a key driver of revenue growth. Management is confident of growing Healthcare payer market by over 15%. Though revenue growth over the next 6 months would be soft, we expect growth rate trajectory to improve as hospitals and payers invest in complying with the Healthcare bill. Retain Reduce: FSL turnaround has begun and believe continued performance on management’s plan would be key for FSL stock. We believe confidence in sustaining inline with industry revenue growth and improved margins are crucial for FSL to service it debts. Assuming current EV of Rs. 17bn remaining constant, annual debt repayment of (US$ 45mn) would result in increase of 33% to equity value. We would wait for more clarity on revenue growth and margins to turn constructive on FSL. Retain Reduce with a price target of Rs. 11.20 arrived by 5x EV/EBITDA Dec-14.

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