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Spark Capital - Firstsource 4QFY14 result review: Though weak quarter , turnaround story still intact; Retain BUY




Spark Capital Advisors(India) Private Limited


06 May 2014





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Firstsource 4QFY14 result review: Though weak quarter , turnaround story still intact; Retain BUY Firstsource (FSOL) reported 4QFY14 numbers which were below expectations. Net revenues declined 0.4% qoq against our expectations of 2.5% growth led by higher hedge losses of Rs. 101 mn. EBITDA margins improved 80 bps qoq (vs our expectations of 100 bps qoq) led by improvement in gross margins. With delay in deal ramp ups, FY15E constant currency revenue growth is expected to be in the range of 6%-8% from earlier expectations of 8%-10%. H2FY15 is expected to be stronger than H1FY15.However, margins is expected to improve 150-170 bps with reduction in the domestic business and cost rationalization efforts. Over last few quarters FSOL has been able to generated cash from operations of ~Rs. 1 bn on the back of margin improvement and reduced working capital cycle. Margin improvement is very crucial for payment of US$ 45 mn next year. Though revenues would be lower than expected in FY15E, hedge gains should provide a breather to net revenues while FY16E would be better with acceleration of spends in U.S. Affordable healthcare act. We retain our positive stance on the back of improving margin performance, increased confidence in debt repayment & attractive valuation with a target price of Rs.36, arrived by attaching 8x to Mar-16 EPS (i.e. Rs.4.5 - normalized for taxes at 25%) . Constant currency growth at 0.6% qoq: Rupee Revenues declined 0.4% qoq and up 12% yoy to Rs.7.96 bn. America grew 3% qoq, UK declined 4% qoq and ROW declined 6% qoq. Healthcare improved 6% qoq while BFS declined 6% qoq. Revenues from top-5 customers increased 5% qoq. Headcount reduced by 2280 this quarter with closing of DC in Colorado. Seat fill factor was at 77% vs. 78% last quarter. FSOL won a large deal worth US$ 45 mn from a Telecom client for three years, expected to ramp up by June-14. Margins expansion to continue: Incessant efforts to increase efficiencies & rationalization of manpower would led to improved EBITDA margin in FY14E. According to management India business alone accounts for one ppts negative impact on EBIT Margins. We are modeling EBIT margins to improve 147 bps & 100 bps in FY15E & FY16E respectively. Retain BUY: We retain our positive stance due improving fundamentals, strong earnings growth, increasing RoE and attractive valuations We expect near-term pressure on the stock owing to lower than expected results and strong rally over last one month (20%). Retain BUY with a target price of Rs.36 , arrived by attaching 8x to Mar-16 EPS (i.e. Rs. 4.5 - normalized for taxes at 25%).

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