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Feb 20, 2013, 01.55 PM IST | Source: Moneycontrol.com

Buy Firstsource Solutions; target Rs 15.3: ABMoney

Aditya Birla Money is bullish on Firstsource Solutions (FSL) and has recommended buy rating on the stock with a target price of Rs 15.3 in its February 19, 2013 research report.

Aditya Birla Money is bullish on Firstsource Solutions (FSL) and has recommended buy rating on the stock with a target price of Rs 15.3 in its February 19, 2013 research report.

"For the quarter Q3FY13, FSL reported a flattish topline of Rs 7132 mn from Rs 7176.3 mn (seasonally soft quarter) on sequential basis and grew by 23.6% on YoY basis. On vertical basis, Telecom continued to lead the growth engine which grew by 1.4% (QoQ). On geographical mix, India (2.2%) led the show on QoQ basis. Top client, continued to grow at an impressive growth of 5.3% (QoQ) and contributed 17.9% in Q313 compared to 12.5% in Q412, whereas Top 5 client declined by 1.5% on QoQ basis. The decline was due to closure of project in Nov/Dec period by one of the top 5 client, which was ramped back again from mid-feb’13.

EBITDA increased by 6 9% to Rs 727 7 mn from Rs  680 7 mn on QoQ basis with a margin improvement of 72 bps to 10 2% Despite cost of growth in new deal, the company continued to drive its operational efficiency and cost rationalization initiatives (Other expenses as % of sales reduced to 21.1% vs 21.5% in Q213) which helped them to improve the margins. Management is fairly confident of further operational enhancement going forward.

PAT improved by 15.4% to Rs 414.5 mn (QoQ) and an increase of five-fold from Rs 68.56 mn on YoY basis.

FCCB hangover overdone - Worst is behind: FSL repaid $237 mn (including redemption premium) worth of FCCB in Dec’12. Thus, reducing the current gross debt levels to $230 mn (net $215 mn). The repayment of principal would kick start from June’13 at an equal quarterly instalments of ~$11.25/qtr (i.e., $45 mn/yr and interest of roughly $11mn/yr) spread over the next 16 quarters. Currently, FSL is generating cash on quarterly run-rate of ~$11 mn. The company is pretty confident of servicing these outflows through internal cash generation. Post FCCB re-payment, FSL net debt: equity ratio stands at 0.58:1.

Outlook & Valuation: The results were ahead of our estimates on operational basis. The management sounded confident on the outlook (likely to achieve the industry growth for FY14E) and said worst was over for the company on operational front. In Q4, the revenue momentum is likely to remain strong on the back of seasonality uptick (however, expected to be relatively subdued on YoY basis) in healthcare and ramp up in recently signed deal wins. Even though, net profit growth is likely to be affected by higher interest outgo and lesser other income starting from Q4, nevertheless, further enhancement in operating margin would offset that going forward.

We revise our earnings estimates upwards for FY13E and FY14E by 10.1% & 12.9% respectively to factor in healthy pipeline & better than expected execution capabilities to Rs 2.28/share & Rs 2.65/share respectively. Currently, the stock trades at 5.0x & 4.3x on its FY13E & FY14E earnings (on post-diluted equity base). We are maintaining our positive stance on the company based upon a) stable outlook, thanks to deal pipeline, b) stability in management (Post CESC acquisition) and c) FCCB overhang behind FSL. We value FSL at 5x on its one year forward earnings with revised target of Rs 15.3, reiterate our Buy rating," says Aditya Birla Money research report.

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