Buy Firstsource; target of Rs 42: ICICIDirect

ICICIDirect's research report on FirstsourceFirstsource reported its Q3FY16 earnings, which were modestly below our estimates Revenues grew 3.2% QoQ to | 818 crore modestly below our | 832 crore and 5% QoQ growth estimate. Constant currency revenues grew 2.2% QoQ At 12.3%, EBITDA margins declined 13 bps QoQ and were below our 56 bps improvement and 13% estimate. Reported PAT of | 67 crore was also modestly below our | 71 crore estimate led by revenue, margin miss We estimate FSL will report revenue, PAT CAGR of 6%, 19% in FY15-17E (average 12.8% EBITDA margins in FY16-17E, 13.7% earlier), vs. 9%, 12% reported in FY10-15 (average 11.8%) as recovery in top customer, acquisition, new deal wins could yield growth and profitability. That said, we are revising our target price lower to | 42 vs. | 45 earlier, as we trim margin and EPS estimate to account for lower margin profile of BPO business of ISGN. We value the stock on FY17E EBITDA applying FY10-15 average EV/EBITDA multiple of 6.7x. The target price discounts our FY17E earnings by 9x.

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