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Spark Capital - Firstsource: Steady progress; Upgrade to ADD




Spark Capital Advisors(India) Private Limited


08 May 2013





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Steady progress; Upgrade to ADD Firstsource (FSOL) reported steady 4Q results with 15% yoy revenue growth and strong margin expansion. Management sounded confident on improving margins in FY14 and using internal accruals to repay debt of US$ 45mn per year. Focus is on improving margins by better profitability in domestic business (12% of revenues) and also rationalisation of sub-scale clients in Healthcare. FY14 would be a year of consolidation with dual aim of higher profitability and better balance sheet. We upgrade FSOL to ADD on the back of better margin performance, increased confidence is debt repayment and attractive valuation. We value FSOL at 4x Mar-15 EV/EBITDA to arrive at our price target of Rs. 12.10. Strong operational performance: Revenues at Rs. 7.2bn up 15% yoy and flat qoq. Revenues were sequentially flat on the back weak performance in the collections business. Collections business declined 5% yoy on the back lower liquidation rate and increased government regulation. Revenue from India grew 6% qoq on the back of price increase. Margins expand by 150bps: Continued focus on operational performance led to reduction in overhead cost and rationalisation of manpower led to margin expansion. Further in FY13 FSOL’s EBITDA margins were impact to the tune of Rs. 255mn owing to cash losses from contract. Improvement to continue: in FY14 management expects Revenues to be in Rs. 29-31bn with Healthcare provider, UK telecom and BFS being the key growth driver. Healthcare provider growth would be aided by Obamacare act and would be strong growth engine over the next three years. Margin expansion would continue with either price increase or rationalisation in domestic business (loss making in FY13), better forex realisation (we expect forex to contribute 100bps to margin expansions) and revenue growth. Upgrade to ADD: Over the last 12 months FSL has addressed a number of issues such as FCCB, shareholder and poor operating performance. We believe the improvements in fundamentals and increased confidence in margin trajectory would help in debt repayment. Assuming current Enterprise Value stays constant repayment of US$ 45mn of debt during FY14 alone would result in a 33% increase to equity value. We value the stock at 4x Mar-15 EV/EBITDA to arrive at our price target of Rs. 12.10. Upgrade to ADD.

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