Firstsource Solutions Limited, a leading BPO player, provides services to both Indian as well as international clients through a mix of offshore and onsite delivery.
Healthcare reforms in USA a margin driver: The company derives majority of its revenues (~40%) from its healthcare vertical catering mainly to US markets. Rising cost pressures on healthcare spend in USA provides an opportunity to Indian service providers as offshoring in the vertical is expected to increase during the coming years.
Operating leverage to kick-in to domestic BPO business: The company also has an Asia Business Unit (catering mainly to Indian domestic BPO business), which employs around 50% of manpower but has a revenue share of around 12%. A rising trend towards outsourcing by Indian companies especially in Telecom and BFSI sector will provide a volume boost to the business.
Strong cash flows to ease leverage situation by FY12E: We expect the company to generate a cash of around Rs 5bn net of capex during FY10E-FY12E, which will help it in part repaying outstanding foreign currency convertible bonds (FCCBs) of USD 212mn. Strong operating parameters will help the company in refinancing for the rest of the amount.
Valuation and recommendation:
At the current market price (CMP) of Rs 29 a share, FSL is trading at 6.3X FY12E earnings. Improving volumes in its Asia Business Unit apart from traction in the healthcare business will lead to improved operating margins during coming years. Buy with a price target of Rs 40 with a time period of 12-15 months.
