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Spark Capital: Firstsource 1QFY14 Result review - Steady progress; Upgrade to BUY




Spark Capital Advisors(India) Private Limited


07 Aug 2013





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Firstsource 1QFY14 Result review - Steady progress; Upgrade to BUY Firstsource (FSOL) reported steady 1Q results with 6.5% yoy revenue growth and EBITDA margin improvement of 300bps yoy. FSOL has made steady progress in addressing some of our key concerns by improving margins and cash flow. Though FY14E could be muted on revenue front with ramp-downs in non profitable Indian business, FY15E could be a better year with increased traction in the healthcare payers market & new deal wins. Over the last four quarters free cash generation has improved and is higher than the crucial ~Rs. 800mn / quarter. FSOL had paid the first installment of it’s foreign debt and management sounded confident on improving margins and using internal accruals to repay the remaining debt of US$ 45mn per year. We upgrade FSOL to BUY on the back of better margin performance, increased confidence is debt repayment and attractive valuation. We value FSOL at 4.5x Mar-15 EV/EBITDA to arrive at our price target of Rs. 17. Steady revenues: Revenues was at Rs. 7.2bn up 4.5% yoy and flat qoq in constant currency. Revenues were sequentially flat on strong Q4 exit. Revenue from top client improved 5.5% qoq after a blip in 4QFY13. Top Client accounted for 19% of revenues. ROW and UK grew 6% and 3% qoq whereas U.S was flat and India declined 3% qoq. Headcount reduced 249 during the quarter and the seat fill factor was flat qoq at 82%. FY14 revenue growth would be led by Healthcare payer and BFS vertical Margins expansion to continue: Incessant efforts to increase efficiencies & rationalization of manpower led to improved EBITDA margin in FY14E. EBIT expansion is expected to be better with capital allocation rationalization especially in the India business. According to management India business alone accounts for one ppts negative impact on EBIT Margins. We are modeling EBIT margins to improve 254 bps and 148 bps in FY14E & FY15E respectively and our estimates are lower than management’s stated targets. Upgrade to ADD: Over the last 12 months FSL has addressed a number of issues such as FCCB, shareholder and poor operating performance. Better FY15E revenue outlook and improvements in margins and cash flows would help in comfortable debt repayment. Assuming current Enterprise Value stays constant repayment of US$ 45mn of debt during FY14 alone would result in a 30% increase to equity value. We value the stock at 4.5x Mar-15 EV/EBITDA to arrive at our price target of Rs. 17. Upgrade to BUY.

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