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Spark Capital: Firstsouce Management meet update -Demand pipeline continues to be robust, Reiterating BUY




Spark Capital Advisors(India) Private Limited


25 Nov 2013





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Demand pipeline continues to be robust, Reiterating BUY We met with the CEO of Firstsource and key takeaways are: Turnaround gathering momentum: Efforts undertaken over the last few quarters are showing good progress, with margin and sales engine being key focus area. FY15E would be a year in which a number of these initiatives would show positive results. Areas addressed include sales team and incentive structure, business mix and projects with low profitability. Revenue growth to kick in post 3Q: Combination of deals signed and projects that are under ramp-up would result in strong revenue growth post 3Q. 3Q would be hit by ramp-downs in projects with low profitability. Growth would be led by top-10 customers . Robust deal pipeline: Deal pipeline is strong across verticals, especially within top-10 customers. Healthcare payor segment is in faster decision making cycle owing to “Obamacare”. While Healthcare provider side has been sluggish, uptick is expected with enrollments from Healthcare Exchanges underway. Margins to improve: Management reiterated their confidence in improving margins for 4QFY14 and FY15. Margin expansion would be a combination of reduction in low margins India business, (more ramp-downs in 3Q and 4Q), better gross margin in new deals, higher forex realisation and better revenue growth. Debt repayment on track: Firstsource requires ~US$ 56mn annually to pay principal and interest and large portion of it would be generated from Firstsource overseas business. Management is confident of continued repayment and deleveraging the balance sheet. Reiterate Buy: Firstsource stock has delivered (110%) in last 6 months and we believe there is more upside. We believe a combination of deleveraging and predictable performance would drive stock returns. We note that Firstsource continues to trade at material discount to its US listed peers. We prefer to value Firstsource on EV/EBITDA basis to normalise for its debt and low tax rates. Retaining Buy with a price target of Rs. 25.

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