Buy Firstsource Solutions; target of Rs 170: Emkay Global Financial

Emkay Global Financial's report on Firstsource Solutions

FSOL delivered an in-line operating performance in Q4. Revenues grew by 5.2% QoQ to USD205.5mn (5.2% CC), but organic revenue growth remained muted. EBITM declined by 70bps QoQ to 11.3%, broadly in line with our estimates. FSOL has guided for FY23 revenue growth of 7-10% YoY (organic 1-4%; guidance assumes 18-21% growth excluding mortgage biz and acquisitions contribution). It has guided for 10.5- 11% EBITM for FY23, factoring in a sharp decline in the mortgage business, a time gap to pass on higher inflation costs and amortization costs owing to acquisitions. Healthcare grew by 5.4% QoQ, led by continued traction in HPHS. BFS grew by 6.9% QoQ, aided by acquisitions. CMT grew by 2.2% QoQ, driven by growth in the top client and continued traction in digital media and Tech clients. We cut FY23E/FY24E EPS by 13%/5%, factoring in weak FY23 guidance, which will also weigh on the stock’s performance in the near term.

Outlook

However, we expect the stock to bounce back gradually as investors gain confidence in a sustainable recovery in sequential revenue growth from Q2FY23. Retain Buy with a revised TP of Rs170 (earlier Rs180) at 17x Mar’24E EPS.