Buy Firstsource Solutions Ltd For Target Rs.145 - Emkay Global
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Exceptional item dents strong operating performance
* Q4 revenues grew 8.2% QoQ to USD199.9mn (7% CC), driven by broad-based growth, strong traction in top client and continued momentum in Mortgage. EBITM expanded 70bps QoQ to 12.4% on the back of acceleration in revenue and operating leverage.
* BFS grew 8.6% QoQ on continued traction in the mortgage business (up ~2.2x YoY). CMT grew 9.8% QoQ due to solid volume growth at top client and new business ramp-ups. Healthcare revenues rose 6.0%, aided by two months of incremental revenue contribution from PatientMatters acquisition.
* FSOL guided for 15-18% CC revenue growth in FY22, implying 0-1% CQGR, as it expects weakness in the Mortgage Refinancing business to be partly negated by anticipated strong recovery in healthcare, traction in CMT and other BFS business. FSOL expects EBITM to be in the range of 11.8%-12.3% for FY22.
* We raise FY22E/23E EPS by 12.8%/16.9%, factoring in Q4 performance beat and higher margin assumptions. Flat sequential growth outlook, uncertainties in Mortgage business growth and poor disclosures around agreement with client would weigh on further rerating in the near term. Retain Buy with a revised TP of Rs145 (from Rs125) at 15x FY23E EPS.
What we liked?
Broad-based revenue growth; EBITM beat, solid volume growth in top client
What we did not like?
Exceptional charge of ~Rs1.1bn on account of increase in value of options granted in the mortgage business to a strategic partner
Broad-based revenue growth; guides for 15-18% CC growth in FY22:
Revenue grew 8.2% QoQ to USD199.9mn (7% QoQ/31.7% YoY in CC), beating our and consensus estimates. Revenue growth was broad based, led by CMT (9.8% QoQ), BFS (8.6%) and Healthcare (6.0%).
FSOL has guided for 15-18% CC revenue growth in FY22, considering 1) strong traction in BFS (strong momentum in UK BFS) and recovery in collections negating potential weakness in the Mortgage business in H2 (Mortgage revenue likely to grow at a moderate pace in FY22 on YoY basis), 2) strong recovery in Healthcare, 3) robust deal intake and 54 client additions in FY21, and 4) traction in media and born-digital clients (added ~8 clients in FY21; expects meaningful contribution from Q4FY22). Top client has recovered strongly and returned to pre-pandemic and pre-portfolio reallocation revenue run rate in Q4. FSOL expects revenues from Top client to stabilize in FY22. It is focusing on US geography to drive growth in the CMT vertical.
EBITM to be in the 11.8%-12.3% range in FY22:
EBITM expanded by 70bps QoQ to 12.4% in Q4 on account of revenue acceleration and operating leverage. FSOL expects FY22 EBITM to be in the range of 11.8%-12.3% (flat to 50bps YoY expansion), considering anticipated strong rebound in the profitable provider business and operating leverage.
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