Buy Firstsource Solutions Ltd For Target Rs. 125 - Emkay Global
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Broad-based revenue acceleration
* Revenue grew 15.6% QoQ to USD184.8mn (14.6% QoQ/23.8% YoY in CC), driven by a broad-based recovery and continued momentum in mortgage. EBITM expanded 20bps QoQ to 11.6% on the back of acceleration in revenue and operating leverage.
* BFS grew 15.9% QoQ on continued traction in the mortgage business (up ~2x YoY) and recovery in UK BFS. CMT recovered sharply in Q3 (26.1% QoQ) due to a solid volume recovery at the top client. Healthcare revenue rose 8% QoQ due to the contribution from PatientMatters acquisition and gradual recovery organically (4.7% QoQ).
* FSOL upped its FY21 revenue growth guidance again to 16-17% YoY CC (earlier 9- 12%), implying 1-4% QoQ growth in Q4. PatientMatters is expected to augment recovery in healthcare from Q4FY21. It expects 11.25-11.5% EBITM for FY21 (earlier 11-11.5%).
* We revised EPS estimates by up to 3.4% for FY21-23, factoring in Q3 performance beat and higher ETR. We maintain Buy with a revised TP of Rs125 (earlier Rs120) at 15x FY23E EPS, considering strong operating performance and robust cash generation (~8% FCF yield)
What we liked?
Broad-based revenue growth; revenue acceleration in top client; robust cash generation (Rs2.3bn/Rs6.2bn FCF in Q3/9MFY21).
What we did not like?
40bps QoQ decline in EBITDAM; slow recovery in healthcare.
Broad-based revenue growth; guidance raised to 16-17%:
FSOL raised its FY21 revenue growth guidance to 16-17% YoY CC (earlier 9-12%), implying 1-4% QoQ growth in Q4. Management remained confident of sustaining revenue growth momentum on the back of 1) strong traction in BFS led by mortgage business (up ~2x YoY) and recovery in UK BFS, 2) anticipated recovery in Healthcare, 3) robust deal intake (including a 5-year deal with TCV of USD22mn), and 4) traction in media and born-digital clients (small size currently, however expect meaningful contribution from these segments by Q4FY22). Revenues from the top customer returned to YoY growth trajectory (12.1% in Q3) on the back of volume recovery and traction in the streaming/OTT business. It added 18 new clients in Q3 (43 in 9MFY21).
EBIT margin expands:
EBITM expanded 20bps QoQ to 11.6% in Q3. However, EBITDAM was under pressure and declined 40bps QoQ due to 1) the required investment (hiring and training) to meet the anticipated strong volume growth in the mortgage business and 2) softness in the provider business as revenue is outcome based while costs remain fixed. The company anticipates recovery in the provider business from Q4FY21, which should aid steady EBITDAM expansion. FSOL has guided for EBITM to be in the range of 11.25-11.5% for FY21 (earlier 11-11.5%) and expects gradual expansion in EBITM in coming years.
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