First Source Solutions LTD - Karvy Recommendation 11 Mar 2016

Mar 11, 2016
Firstsource Solutions
Ltd
Mar 11, 2016
Technology - Technology Services - IT Services

Company Update
Firstsource Solutions Ltd

Bloomberg Code: FSOL IN
BUY
India Research - Stock Broking
Healthcare & BFSI to Lead the Future Course; Debt Repayment

is in Line
Modest revenue growth & margin slips by 13bps qoq: Firstsource reported
revenue of Rs. 8178 mn in Q3FY16 which is up by 3.2% Q-o-Q and 8.9% Y-o-Y.
EBITDA is Rs. 1005 Mn which was Rs. 984 Mn in Q2FY16 and the margins dropped
to 12.3% which is by 13 bps Q-o-Q and 17 bps Y-o-Y. This sluggish movement
and ramp down in margins mainly due to disruption in Chennai operations and
business continuity cost. However, the growth momentum is expected to continue
in Q4FY16E due to ISGN acquisition, demand in Healthcare and BFSI segments.
Impact of Chennai floods Slight correction on operating performance:
FSL operating over 3000 employees in Chennai which deals with transaction
processing for healthcare business; and because of the disruption in Chennai
operations due to floods, the company lost $2 Mn which also translates into 0.5%
impact for the full year and this impact on the profit side is almost $1 Mn in FY16E.
ISGN acquisition driving the synergies and business potential: FSL signed
a definitive agreement to acquire the BPO, the services side of the business for
a consideration of $13 Mn of ISGN Corporation. ISGN is a leading full service
provider of mortgage, technology and services. Management is expecting that this
acquisition helps to gain a footprint in to the North American mortgage market. Over
700 employees of ISGN based in US and India will become part of the Firstsource
team on closure. The revenue of ISGN for FY15 is about $25 mn which has an impact
of negative EBITDA currently. However, management is confident to bring EBITDA
positive in FY17E which impacts good improvement in EPS on blended basis.
Valuation and Outlook
As Q3FY16 results were little upset and we marginally changed our revenue as
ISGN additional revenue is kicking in Q4FY16E & FY17E which also affect the
margins in FY16E & FY17E. On the back of demand environment in Healthcare
and BFSI segments, we continue to maintain our positive outlook on FSL and we
maintain our BUY rating with a target price of Rs. 50, based on 10.3x P/E FY17E,
representing an upside potential of 43%.
Key Risks
EBITDA
EBITDA Margin (%)

Adj. Net Profit
EPS (Rs.)
RoE (%)
PE (x)
FY15
FY16E
FY17E
28185
31059
30347
32394
35295
1466
2.9
9.3
3.5
50
Previous Target Price
52
Upside (%)
43
Stock Information
Mkt Cap (Rs.mn/US$ mn)
23929 / 356
3M Avg. daily volume (mn)
2.3
52-wk High/Low (Rs.)

Beta (x)
Sensex/Nifty
46 / 24
0.8
24623 / 7486
O/S Shares(mn)
673.1
Face Value (Rs.)
10.0
Shareholding Pattern (%)

Promoters
55.6
FIIs
8.5
DIIs
7.5
Others
28.4
Stock Performance (%)

1M
3M
6M
12M
(8)
32
14
Absolute
Relative to Sensex
(7)
37
33
Source: Bloomberg
Relative Performance*
135
115
95
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
FY14
9.9
Target Price
35
Firstsource
FY13
2796
39
CMP (Mar 10, 2016)
Sensex
Source: Bloomberg; *Index 100
Exhibit 1: Valuation Summary (Rs. Mn)

Net Sales
Initiation Price
75
yyHigh attrition.
yyCompetition from other players.
yyCurrency fluctuations.
YE Mar
Recommendation (Rs.)
3621
11.7
1930
2.9
10.1
8.6
3808
12.5
2343
3.5
11.2
11.0
4098
12.7
2748
4.1
12.3
9.5
4535
12.9
3269
4.9
12.9
8.0
Source: Company, Karvy Research; *Represents multiples for FY13, FY14 & FY15 are based on historic market price
For private circulation only. For important information about Karvys rating system and other disclosures refer
to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>,
Thomson Publishers & Reuters
Earnings Revision (%)

YE Mar (Rs. Mn)
Sales (%)
FY16E
LL
0.8
FY17E
LL
2.2
Adj. PAT (%)
LL(0.9)
LL(2.7)
EBITDA (%)
LL(3.4)
LL(3.5)
Source: Company, Karvy Research;
Analyst Contact
Prasanth Victor
040 - 3321 6271
v.prasanth@karvy.com
Mar 11, 2016

Exhibit 2: Q3FY16
YE Mar (Rs. Mn)
Q3FY16
Q2FY16
QoQ %
Q3FY15
YoY %
Turnover
8178
7925
3.2
7510
8.9
EBITDA
1005
984
2.1
936
7.5
Expenditure
7173
Depreciation
6941
160
Interest
124
Other Income
183
(12.6)
124.3
61
15.5
130
21
PBT
742
680
PAT
670
619
Tax
70
3.3
6575
(4.7)
9.1
189
(15.5)
25
(16.8)
173
9.1
598
8.4
575
(28.4)
24.1
21
230.8
16.6
EBITDA (%)
12.3
12.4
(13) bps
12.5
(17) bps
Net profit (%)
8.2
7.8
39 bps
7.7
54 bps
EBIT (%)
10.6
10.2
36 bps
10.3
32 bps
Source: Company, Karvy Research
Exhibit 3: Financials
Adjusted Financials (Rs. Mn)
Net Sales
EBITDA
Adj FY14
FY15
FY16E
FY17E
31059
30347
32394
35295
11.7
12.5
12.7
12.9
3621
EBITDA margin (%)

Adj. Net profit
EPS(Rs.)
4098
4535
1930
2343
2748
3269
0.7
20.5
16.1
18.9
2.9
YoY growth (%)
3808
3.5
4.1
4.9
Debt repayment in line - Healthcare and Banking are the key growth drivers:
FSL continues to repay debt as per plan of $11.25 Mn per quarter. Debt repayment to be supported by healthy free cash flow
generation. The Net long-term debt of $97 Mn as of December 31, 2015. Management is looking at FY17E net debt levels
should be around $25 Mn to $30 Mn because at least the $45 Mn in the normal repayment which will take place. As mentioned
in our initiation report, the ramp down in revenue from Telecom segment is stabilized in Q3FY16, management indicated that
US Telco client operating performance is improving. Demand environment continues to be robust across business segments of
Healthcare and Customer Management, the primary growth engines for FSL which are witnessing a robust upward trajectory.
Exhibit 4: Financials
YE Mar (Rs. Mn)
Net Sales (Rs. Mn)
EBITDA (Rs. Mn)
EBITDA Margin (%)

Adj. PAT (Rs.)
EPS (Rs.)
FY16E
Old
New
32133
32394
13.2
4242
2772
4.1
FY17E
Old
New
0.8
34540
35295
12.7
(55) bps
13.6
12.9
(75) bps
4.1
0.0
4.9
(0.5)
4098
2748
% Change
(3.4)
(0.9)
4698
3280
4.9
4535
3269
% Change
2.2
(3.5)
(0.3)
Mar 11, 2016

Financials
Exhibit 5: Income Statement
YE Mar (Rs. Mn)
FY13
FY14
FY15
FY16E
FY17E
Revenues
28185
31059
30347
32394
35295
Operating Expenses
25390
27438
26539
28296
30760
51.0
29.5
5.1
7.6
10.7
Growth (%)
EBITDA
Growth (%)
Depreciation & Amortization

Other Income
25.0
2796
884
464
10.2
3621
(2.3)
3808
6.7
4098
757
722
775
20
65
78
9.0
4535
806
80
EBIT
2376
2884
3151
3401
3809
PBT
1592
2033
2440
2902
3472
1466
1930
2343
2748
3269
YE Mar (Rs. Mn)
FY13
FY14
FY15
FY16E
FY17E
Cash & Equivalents
901
1863
802
620
528
1659
1570
Interest Expenses
Tax
Adjusted PAT
Growth (%)
784
129
136.3
851
101
31.6
711
95
21.4
499
152
17.3
337
202
18.9
Exhibit 6: Balance Sheet
Sundry Debtors
Loans & Advances

Investments
Gross Block
Net Block
CWIP
3866
27
8131
1543
18
3019
2890
3084
3361
52
734
734
734
8675
1364
1459
9129
1103
85
1590
9912
1161
85
1652
10762
1254
85
Goodwill
23601
25940
23336
23336
23336
Total Assets
33724
36895
34265
34473
35054
Debt
10129
9100
7303
5303
2933
Total Liabilities
16576
15966
13363
10823
8135
Reserves & Surplus
10560
14317
14223
16971
20240
Miscellaneous
Current Liabilities & Provisions
Deferred tax liabilities
Shareholders Equity
2109
6164
283
6577
3081
6548
317
6597
3856
5715
345
6663
3864
5175
345
6663
4104
4857
345
6663
Total Networth
17136
20914
20886
23634
26903
Total Networth & Liabilities
33724
36895
34265
34473
35054
Minority Interest
11
14
16
16
16
Mar 11, 2016

Exhibit 7: Cash Flow Statement
YE Mar (Rs. Mn)
FY13
FY14
FY15
FY16E
FY17E
PBT
1592
2033
2440
2902
3472
Depreciation
Interest
884
784
757
851
722
711
499
337
(191)
(417)
Others
(356)
(515)
Inc/dec in capital expenditure
(396)
(358)
(463)
(783)
(850)
Others
6255
251
100
Cash flow from operating activities

Inc/dec in investments
Cash flow from investing activities

Inc/dec in borrowings
Issuance of equity
Interest paid
Cash flow from financing activities

Net change in cash
(720)
1993
(29)
5830
(10814)
2662
(659)
(8811)
(987)
1247
(1048)
3956
2460
(26)
146
(680)
(133)
(1042)
27
113
(2086)
(805)
(2864)
959
(2133)
(444)
(627)
806
Tax Paid
Inc/dec in Net WC
(510)
775
(418)
3134
(815)
(2000)
(499)
(758)
(596)
207
3468
(853)
(2370)
(337)
(2464)
(2499)
(2707)
(1046)
(180)
(92)
Exhibit 8: Key Ratios

YE Mar
FY13
FY14
FY15
FY16E
FY17E
EBITDA Margin (%)
9.9
11.7
12.5
12.7
12.9
Net Profit Margin (%)
5.2
6.2
7.7
8.5
9.3
EBIT Margin (%)
Dividend Payout Ratio (%)

Net Debt/Equity (x)
RoE (%)
8.4
0.0
0.4
9.3
0.0
0.4
10.4
10.5
0.0
0.3
0.0
0.3
10.8
0.0
0.1
9.3
10.1
11.2
12.3
12.9
FY13
FY14
FY15
FY16E
FY17E
2.9
2.9
3.5
4.1
4.9
BV (Rs.)
26.1
31.7
31.3
35.3
40.1
P/BV (x)
0.4
0.8
1.2
1.1
1.0
RoCE (%)
9.3
10.1
10.8
11.9
13.0
Exhibit 9: Valuation Parameters

YE Mar
EPS (Rs.)
DPS (Rs.)
PE (x)
EV/EBITDA (x)
EV/Sales (x)
0.0
3.5
5.7
0.6
0.0
8.6
6.6
0.8
0.0
11.0
8.5
1.1
Source: Company, Karvy Research; *Represents multiples for FY13, FY14 & FY15 are based on historic market price
0.0
9.5
7.5
1.0
0.0
8.0
6.3
0.8
Mar 11, 2016

Stock Ratings
Buy
Sell
Hold
Absolute Returns
> 15%
5-15%
<5%
Connect & Discuss More at

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Analyst certification: The following analyst(s), Prasanth Victor, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein,
certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his
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Technology - Technology Services - IT Services