1
Feb 07, 2017
Firstsource Solutions Ltd
Recommendation (Rs.)
CMP (as on Feb 06, 2017) 40
Target Price 46
Previous Target Price 46
Upside (%) 16
Stock Information
Mkt Cap (Rs.mn/US$ mn) 26818 / 398
52-wk High/Low (Rs.) 54 / 29
3M Avg. daily volume (mn) 1.6
Beta (x) 1.2
Sensex/Nifty 28439 / 8801
O/S Shares(mn) 676
Face Value (Rs.) 10.0
Shareholding Pattern (%)
Promoters 55.2
FIIs 9.7
DIIs 6.5
Others 28.7
Stock Performance (%)
1M 3M 6M 12M
Absolute 4 1 (18) 13
Relative to Sensex (2) (2) (19) (2)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Soften Operating Performance Due to Macro Environment
Headwinds
Muted revenue growth & margins declined by 60bps: FSL reported revenue of
Rs. 8854 mn in Q3FY17 which is up by 0.1% QoQ and 8.2% YoY. EBITDA in Q3FY17
is lower by 4.8% QoQ at Rs.1072 Mn which was at Rs. 1126 Mn in Q2FY17 and
the margins dropped to 12.1% which is down by 62 bps QoQ and 27 bps YoY. This
sluggish movement and ramp down in margins mainly due to currency headwinds,
weakness in mortgage business, and lower volumes from two of the company’s
telecom clients. This also impacted PAT which stood at Rs. 698 Mn in this quarter as
compared to Rs. 712 Mn in Q2FY17.
Macro environment headwinds impact operating margins: US interest rates
and resultant bond yields impact mortgage market in US. The business potential
of ISGN highly aected by the US current interest rate. Continued weakness of the
GBP as UK Supreme Court ruled that the Government must hold a parliamentary
vote to trigger the start of ocial negotiations to exit the European Union. Any
impending changes to Obamacare (a Patient Protection and Aordable Care Act,
a health reform law signed on March 23, 2010, by President Barack Obama) and
other executive decisions by the current US administration.
However, management expects decent revenue growth visibility in FY18E driven
by SKY deal with incremental revenue of ~US$32 mn in FY18E implying more
than 6.0% YoY growth visibility for FY18E. Management indicated that the phased
transition of SKY deal is progressing as planned and 2nd phase of transition will be
eective from Q1FY18E involving ~900 to 1000 people.
Valuation and Outlook
We are introducing FY19E estimates and marginally changed our revenue estimates
in FY17E-18E which also aects the margins. Despite uncertainties around US
mortgage business and payer business, recently concluded SKY deal supports
growth visibility for FY18E-19E. We continue to maintain our positive outlook on
FSL and we maintain our “BUY” rating with a target price of Rs. 46, based on 7.7x
P/E FY19E, representing an upside potential of 16%.
Key Risks
High attrition.
Competition from other players.
Currency uctuations.
For private circulation only. For important information about Karvy’s rating system and other disclosures refer
to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>,
Thomson Publishers & Reuters
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY15 FY16 FY17E FY18E FY19E
Net Sales 30347 32303 35723 39432 42897
EBITDA 3808 4048 4573 5323 5705
EBITDA Margin (%) 12.5 12.5 12.8 13.5 13.3
Adj. Net Prot 2343 2650 2887 3481 4021
EPS (Rs.) 3.5 4.0 4.3 5.1 5.9
RoE (%) 11.2 11.7 11.2 12.1 12.3
PE (x) 8.8 8.5 9.3 7.7 6.7
Source: Company, Karvy Research; *Represents multiples for FY15 & FY16 are based on historic market price
Company Update
India Research - Stock Broking
BUY
Analyst Contact
Prasanth Victor
040 - 3321 6271
v.prasanth@karvy.com
Information Technology-Software & Services
Firstsource Solutions Ltd
Bloomberg Code: FSOL IN
65
80
95
110
125
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug -16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Firstsour ce Solutions Ltd
Sensex
Earnings Revision (%)
YE Mar FY17E FY18E
Sales (%) 0.3 1.0
EBITDA (%) 0.4 4.1
PAT (%) (3.9) 4.0
Source: Karvy Research
L
L
L
L
L
L
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Feb 07, 2017
Firstsource Solutions Ltd
Key Takeaways of Conference Call:
Management reiterates growth outlook for FY17E due to macro environment uncertainties. However, margins could be
impacted slightly due to cost of growth, underperformance of the mortgage BU and the currency movements.
Focus continues to provide dierentiated value through productized service oerings through automation, analytics and
digital.
Net long-term debt was at $72 Mn as on Q3FY17 which will be further reduced in coming quarters as principal repayments
of $11.25 Mn every quarter is happening as per schedule.
Headcount of 15,573 is in India and 10,419 employees based outside India as of Q3FY17. Seat ll factor is at 74.5% as on
Q3FY17, compared to 72.1% QoQ.
Exhibit 2: Q3FY17
YE Mar (Rs. Mn) Q3FY17 Q2FY17 QoQ % Q3FY16 YoY % 9MFY17 9MFY16 YoY %
Turnover 8854 8844 0.1 8186 8.2 26633 23478 13.4
Expenditure 7782 7718 0.8 7173 8.5 23243 20689 12.3
EBITDA 1072 1126 (4.8) 1013 5.8 3390 2790 21.5
Depreciation 156 160 (2.5) 160 (2.5) 479 515 (7.0)
Interest 93 103 (9.7) 118 (21.2) 321 384 (16.4)
Other Income 8 (2) NM 14 (42.9) 19 61 (68.9)
PBT 831 861 (3.5) 749 11.0 2609 1952 33.7
Ta x 131 148 (11.5) 75 74.7 462 162 185.2
PAT 698 712 (2.1) 676 3.2 2144 1795 19.5
EBITDA Margin (%) 12.1 12.7 (62) bps 12.4 (27) bps 12.7 11.9 85 bps
EBIT Margin (%) 10.3 10.9 (58) bps 10.4 (7) bps 10.9 9.7 124 bps
Net Prot Margin (%) 7.9 8.1 (18) bps 8.3 (38) bps 8.1 7.6 41 bps
Source: Company, Karvy Research
Exhibit 3: Change in Estimates
YE Mar - Standalone (Rs. Mn)
FY17E FY18E FY19E
Old New % Change Old New % Change New (Introducing)
Net Sales 35613 35723 0.3 39041 39432 1.0 42897
EBITDA 4553 4573 0.4 5114 5323 4.1 5705
EBITDA margin (%) 12.8 12.8 2 bps 13.1 13.5 40 bps 13.3
Adj. PAT 3005 2887 (3.9) 3346 3481 4.0 4021
EPS (Rs.) 4.5 4.3 (5.4) 5.0 5.1 2.7 5.9
Source: Karvy Research
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Feb 07, 2017
Firstsource Solutions Ltd
Financials
Exhibit 4: Income Statement
YE Mar (Rs. Mn) FY15 FY16 FY17E FY18E FY19E
Revenues 30347 32303 35723 39432 42897
Growth (%) (2.3) 6.4 10.6 10.4 8.8
Operating Expenses 26539 28255 31150 34109 37192
EBITDA 3808 4048 4573 5323 5705
Growth (%) 5.1 6.3 13.0 16.4 7.2
Depreciation & Amortization 722 662 676 776 874
Other Income 65 94 57 73 81
EBIT 3151 3481 3953 4620 4912
Interest Expenses 711 524 503 430 0
PBT 2440 2956 3451 4190 4912
Tax 95 302 559 705 887
Adjusted PAT 2343 2650 2887 3481 4021
Growth (%) 21.4 13.1 9.0 20.6 15.5
Source: Company, Karvy Research
Exhibit 5: Balance Sheet
YE Mar (Rs. Mn) FY15 FY16 FY17E FY18E FY19E
Cash & Equivalents 802 689 1890 2129 2738
Sundry Debtors 2890 3041 2679 2681 2917
Loans & Advances 1459 3123 2498 2112 1763
Investments 734 852 736 606 470
Gross Block 9129 8991 10283 11458 12900
Net Block 1103 1328 1944 2343 2911
CWIP 85 79 79 79 79
Goodwill 23336 24692 24692 24692 24692
Miscellaneous 3856 2869 3059 3366 3700
Total Assets 34265 36672 37577 38009 39271
Current Liabilities & Provisions 5715 6335 5449 4948 4339
Debt 7303 5795 4698 2150 0
Deferred tax liabilities 345 272 272 272 272
Total Liabilities 13363 12402 10420 7370 4611
Shareholders Equity 6663 6733 6733 6733 6733
Reserves & Surplus 14223 17518 20405 23886 27907
Total Networth 20886 24251 27138 30619 34640
Minority Interest 16 20 20 20 20
Total Networth & Liabilities 34265 36672 37577 38009 39271
Source: Company, Karvy Research
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Feb 07, 2017
Firstsource Solutions Ltd
Exhibit 6: Cash Flow Statement
YE Mar (Rs. Mn) FY15 FY16 FY17E FY18E FY19E
PBT 2440 2956 3451 4190 4912
Depreciation 722 662 676 776 874
Interest 711 524 503 430 0
Tax Paid (510) (577) (559) (705) (887)
Inc/dec in Net WC (1048) (451) 26 (294) (694)
Others 146 (118) 0 0 0
Cash ow from operating activities 2460 2997 4097 4397 4206
Inc/dec in capital expenditure (463) (858) (1292) (1175) (1442)
Inc/dec in investments (680) (36) 0 0 0
Others 100 (143) (1) (4) (4)
Cash ow from investing activities (1042) (1037) (1293) (1179) (1446)
Inc/dec in borrowings (2133) (1486) (1097) (2548) (2150)
Issuance of equity 113 117 0 0 0
Dividend paid 0 0 0 0 0
Interest paid (444) (706) (503) (430) 0
Cash ow from nancing activities (2464) (2074) (1600) (2978) (2150)
Net change in cash (1046) (114) 1204 239 609
Source: Company, Karvy Research
Exhibit 7: Key Ratios
YE Mar FY15 FY16 FY17E FY18E FY19E
EBITDA Margin (%) 12.5 12.5 12.8 13.5 13.3
EBIT Margin (%) 10.4 10.8 11.1 11.7 11.5
Net Prot Margin (%) 7.7 8.2 8.1 8.8 9.4
Dividend Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0
Net Debt/Equity (x) 0.3 0.3 0.2 0.0 0.0
RoE (%) 11.2 11.7 11.2 12.1 12.3
RoCE (%) 10.8 12.0 12.8 14.3 14.6
Source: Company, Karvy Research
Exhibit 8: Valuation Parameters
YE Mar FY15 FY16 FY17E FY18E FY19E
EPS (Rs.) 3.5 4.0 4.3 5.1 5.9
DPS (Rs.) 0.0 0.0 0.0 0.0 0.0
BVPS (Rs.) 31.3 36.0 40.0 45.2 51.1
PE (x) 8.8 8.5 9.3 7.7 6.7
P/BV (x) 1.0 0.9 1.0 0.9 0.8
EV/EBITDA (x) 7.1 6.9 6.5 5.0 4.2
EV/Sales (x) 0.9 0.9 0.8 0.7 0.6
Source: Company, Karvy Research, *Represents multiples for FY15 & FY16 are based on historic market price
5
Feb 07, 2017
Firstsource Solutions Ltd
Stock Ratings
Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : <5%
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