FirstSource Solution Research Report By HDFC Sec

FirstSource Solution Ltd (FSL) is a leading global provider of BPO services through end to end customer life cycle management across different industry verticals i.e. Telecom & Media, BFSI and Healthcare. The verticals contributed 32.2%, 31.8% and 35.8% respectively to the company’s revenue during FY17. The company, on a consolidated basis has 48 global delivery centres as on FY17, located in India, US, Europe, Philippines and Sri Lanka. 17 out of ‘The Fortune 500’ Companies are included in company’s client list.

On consolidated basis, company has 48 global operation centres as on 31 March 2017. 20 of the Company’s operation centres are located across 13 cities in India and it has 18 centres in US, 8 in UK and 2 in Philippines.

We Recommend FirstSource Solution Ltd (FSL) as a BUY on decline of Rs. 36 to 33 for the targets Rs. 47 (8.2x FY20E) and Rs. 55 (9.6x FY20E) in six Quarters time frame.

Investment Rationale:

Strong Parental Base

FSL was promoted as ICICI Infotech Upstream Ltd in December, 2001 by ICICI Bank Ltd. In 2012-13, the RP Sanjiv Goenka Group acquired 56.8% (34.5% by subscribing to preferential issue of shares and the balance by secondary purchase and open offer for sale by existing investors) shares of FSL through, wholly-owned subsidiary of CESC Ltd, SpenLiq Pvt Ltd. ICICI bank still holds around 4.9% stake in the company. The RP-Sanjiv Goenka group has interests across diverse business sectors such as power & natural resources, infrastructure, carbon black, retail, education and media & entertainment. Strong parental base help company in gaining trust while acquiring new clients.

Company well on track to go debt free

Company has maintained healthy free cash flow over last few years and this has helped it in repayment of debt considerably. FSL has continued its debt repayment this quarter also and successfully made its quarterly principal repayment of US $11.25mn. Net long term debt is at $ 64.3mn as on September 30, 2017. At the current repayment rate of $11.25 mn quarterly run-rate, FSL is expected to go debt free by FY19.

Healthcare: The backbone

Firstsource addresses two market segments within the Healthcare vertical, the Payer market represented by the Insurance companies and the Provider market represented by hospitals in the US. Healthcare & Insurance is the largest vertical for FSL, and contributes 36% to the revenue mix.

Cliental base for the company includes 5 of the top 10 health insurance/managed care companies and around 650 hospitals in US. Its presence across both the segments (Player and Provider) of this market gives the Company a strong differentiating edge.

The Global Healthcare BPO market is expected to register ~6% CAGR by 2020. Revenue of the Global healthcare IT-BPM market is expected to grow from US $170.7 bn in 2016 to US $276.8 bn in 2021. The market drivers for the Healthcare IT-BPO industry are consolidation among and between payers and providers. In addition, the technological advances like robotics process automation, digital transformation, new operations and billing models, will contribute to the forecasted growth.

Telecom and Media

2016 was a transformational year for the telecom and networking industry. Since then the demand for data is surging day by day. This has changed the whole industry landscape. The growth of phones is far outpacing the fixed line connectivity. With more and more people using mobile, the consumption of voice and data is only going to increase. With a plethora of schemes for pre-paid and post-paid being introduced at regular intervals by the mobile operators, subscribers are going to increasingly use the services of BPO/BPM providers for the clarification on pricing and usage. Company derives 32.2% revenues from Telecom & Media segment as on FY17.

Last January, the company has renewed its contract with Sky for the next 10 years, which has been customer since 2002. Sky is the largest entertainment company in Europe and a provider of DTH, mobile and broadband services in the UK. This deal will fetch revenue worth ~Rs. 12000 Cr over the next 10 years.

Banking, Financial services and Insurance (BFSI)

BFSI has been one of the largest adopters of global outsourcing services in the last few years. The global outsourcing market in BFSI sector is likely to grow at a CAGR of around 6% during FY16-20. The need to conform to regulatory compliance is a key factor driving the growth of this market. The BFSI sector is witnessing massive regulatory changes and oversight which has resulted in increased demand for regulatory compliance and transparency in this sector. The reduction in cycle time obtained by outsourcing is another factor driving the market growth. Outsourcing of business processes in the BFS sector has enabled multinational financial institutions to reduce their turnaround time.

Mortgage BPM stands out as one of the largest segment within the banking BPM space. According to Everest research group the mortgage BPM industry is estimated to be $1.5 bn, currently which is growing at CAGR of 11-12% in the last couple of years and a similar growth rates is expected in the future. Company derives 31.8% revenues from BFSI segment as on FY17.

View & Valuation:

Company trades at a compelling valuation of 9x of FY18E earnings and 6.7x of FY20E. We have predicted around 5% CAGR in Rupee revenue and 11% CAGR in PAT over FY17-20E. According to the management’s guidance, company will be debt free by FY19.

Post CESC spin off, the resultant holding company might want dividend as income from the investment it holds and FSL being one such investment might have to start giving dividend. Although we have not considered any such entry in our predictions.

Sky and ISGN solution deals renewal is another big positive for the company.

Ace investors like Rakesh Jhunjhunwala also holds 2.92% equity in his portfolio.

We Recommend FirstSource Solution Ltd (FSL) as a BUY BUY on decline of Rs. 36 to 33 for the targets Rs. 47 (8.2x FY20E) and Rs. 55 (9.6x FY20E) in 6 Quarters time frame.