Buy Firstsource Solutions; target of Rs 85: Dolat Capital

Dolat Capital's research report on Firstsource Solutions

Firstsource (FSL) reported above expectation results, with a sequential revenue de-growth of 4.3% in CC terms (DART estm: 6.0% decline) due to positive surprise in BFSI Vertical (up 13.9% QoQ in $ terms) and OPM improvement of about 20bps QoQ at 11.0% (DART estm: 10.2%) led by improvement in BFSI vertical margins to 18.6% (up 410bps QoQ). FSL re-introduced the FY21 Guidance of 6% to 10% growth in CC terms and OPM of 11.0% to 11.5%. We believe guidance is driven by strong deal win momentum (10 new logos addition and strategic win in Healthcare) and expected near term traction in BFSI Vertical, revival of healthcare vertical by Q2/Q3 and volume bounce back in CMT in June. Significant additions in its leadership team (Exhibit 7) and revived operating structure to better capture potential opportunities around adjacencies, cross-sell and domain capabilities. Client concentration is coming off as it is doing well in newer areas, but do not see any significant risk in Top account (13.7% of rev) and expect it to revive gradually.

Outlook

Strong growth guidance (6-10% for FY21), robust client additions, improved profitability, widened bandwidth & market opportunities, reducing client concentration, generous payouts (imply 5% yield) and attractive valuations (FCF yield ~9%) make a strong case for significant re-rating of the stock. Factoring the same, we maintain our Buy rating on the stock with TP of Rs85 (valued at 13x PE on FY22E – implies 1x on PEG basis).