Buy Firstsource Sol; target of Rs 26.50: Aditya Birla Money

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Buy Firstsource Sol; target of Rs 26.50: Aditya Birla Money

Aditya Birla Money is bullish on Firstsource Solutions and has recommended buy rating on the stock with a target of Rs 26.50 in its June 14, 2011 research report.

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Aditya Birla Money is bullish on Firstsource Solutions and has recommended buy rating on the stock with a target of Rs 26.50 in its June 14, 2011 research report.

"Firstsource Solutions, UK-based Serco Group has bought out the entire stake of Intelenet for £385 mn or Rs 28.54 bn (including £50 mn of contingent payments) from Blackstone (66.0%), Barclays (12.75%), HDFC (4.5%) and the rest was held by the management. In FY11, Intelenet earned revenues of Rs12.45 bn, with EBITDA of Rs 2.34 bn. The deal has valued Intelenet at 10.5x-12.0x on its FY11 EBITDA and ~2.0x on its revenues. This deal rekindles the investors' interest in BPO sector especially India based BPO's, which are trading at a substantial discount to its global peers. The deal has happened at a substantial premium of 77.5% on EV/EBITDA and 106% on EV/Sales terms to the current valuation of FSL. Considering the business similarities in Intelenet and FSL, the operational scale of FSL, strong presence in domestic as well as onshore market, we believe that there is lot of value in FSL."

"Vertical wise - BFSI is likely to lead the growth in FY12, with the help of new accounts like Barclay card's, whose full year benefit would accrue this year. Healthcare - the company is likely to benefit from payers segment, as they are the early adaptors of US healthcare reform leading to stable revenue flow. Telecom vertical would continue to remain under pressure till H2FY12 as one of the existing telecom client would ramp down its operations. However, the management is quite confident of closing some deals over the next 3-4 months and that would compensate for the loss in revenues in H2FY12. ABU is expected to benefit from consolidation and stability in Indian telecom market, with improvement in margin. The one-offs from the egovernance and the government contracts could also add. Added to this, the recent expansion to Sri Lankan market through Dialog Axiata JV (74:26) would further bring growth in this vertical. On overall basis, the management has indicated increased revenue momentum and further scope for margin improvement, with Asia Business Unit (ABU) breaking even. However, Q1FY12 would see a dip in revenue, on account of seasonal advantage in Q4FY11 from collections and healthcare. This coupled with client ramp-down in telecom segment would lead to pressure in the H1. New deal wins in H1 would again lead to ramp up and growth in H2."

"Over the last few quarters, FSL's cash generation has been good. It had a cash position of ~$103 mn at 31Mar-11. We expect FSL to generate ~$9mn cash/quarter and to reach to ~$170mn by FY13. FSL would be in a comfortable position to refinance the rest of the outstanding FCCBs (total obligation - $296mn by Dec 2012). As on March 2011, Net debt/EBITDA and Net debt/Equity stood at 3.67x & 0.73x respectively. This is expected to come down to 2.0x & 0.42x post-FCCB payment in FY13."

"Currently, FSL trades at 5.0x and 4.3x on its FY12E & FY13E EPS of Rs 3.69 and Rs4.28 respectively. The Intelenet acquisition and valuation once again reaffirms our conviction and Investor / business interest towards a pure-play BPO outfit. This deal is likely to have a rub-off effect on FSL and would support the stock in the medium term. Considering the FSL scale, improving operating cash flows and reasonable valuations, we reiterate BUY rating on the stock with a price target of Rs 26.5 per share," says Aditya Birla Money research report.   

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