Buy Firstsource Solutions; target of Rs 160: Emkay Global Financial

Emkay Global Financial's research report on Firstsource Solutions

FSOL reported a mixed performance in Q1. Revenue fell 2.1% QoQ (3% CC) to USD186mn, below our estimate of USD189.4mn. FSOL has renewed its contract with its largest client for another 10 years, which would entail payment of GBP15mn but removes uncertainties. The mortgage segment has stabilized and should see pickup in volumes unless there is further deterioration in macros. FSOL expects Q2 growth to be modest, impacted by the offshore shift, followed by pickup in growth from H2FY24. FSOL has retained its revenue growth guidance of 2-5% CC and 11-12% EBITM for FY24 despite increased headwinds from the offshore shift (expect impact of 3.5-4.0% from earlier 3%). Guidance assumes CMT (ex-top client) and HPHS to be the growth drivers, with a gradual improvement in collections and providers. We have cut our FY24-26E EPS estimates by 1.7-4.4%, factoring in Q1 performance.

Outlook

We have raised our target multiple to 15x (earlier 13x), considering increased confidence on growth recovery and margin resilience with anticipated offshore shift. We roll forward the TP to Sept-25 EPS and maintain BUY with a TP of Rs160 (earlier Rs135).