Published on 24/11/2020 12:00:01 PM | Source: Emkay Global Financial Services Ltd

Buy Firstsource Solutions Ltd For Target Rs.90 - Emkay Global

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Mortgage biz drives revenue growth; raises revenue guidance

* Revenue grew 11.8% QoQ to Rs11.9bn (up 12.2% QoQ/13.1% YoY in CC), led by strong momentum in mortgage and recovery in the top account. EBITM expanded 40bps QoQ to 11.4% on the back of acceleration in revenue, offshore shift and operating efficiencies.

* BFS grew 13.4% QoQ on continued traction in the mortgage business (up ~2.1x YoY). Healthcare was muted (1.4% QoQ) as it experienced volume compression with delayed elective treatments and declining hospital visits and claims volume. CMT recovered sharply in Q2 due to a solid volume recovery at the top client.

* FSOL upped its FY21 revenue growth guidance to 9-12% YoY CC (earlier 6- 10%) and retained EBITM guidance of 11-11.5%. Revenue guidance implies a 1.7-5.2% CQGR in H2. Management attributed the wide guidance range to uncertainties over the health crisis.

* Anticipated increase in revenue growth, delivery on guidance and strong cash generation would support high valuations. We assume coverage on FSOL with Buy and a TP of Rs90 at 12x Sept’22E earnings.


What we liked? Strong traction in BFS led by Mortgage business; Sharp recovery in Top client; Robust cash generation (Rs3.9bn FCF in H1).


What we did not like? Softness in Healthcare.


Strong revenue performance; revenue growth guidance raised to 9-12%: FSOL upped revenue growth guidance to 9-12% YoY CC for FY21, implying a 1.7-5.2% CQGR in H2. The management remained confident on sustaining revenue growth momentum on the back of a) strong traction in BFS led by the mortgage business (up ~2.1x YoY in Q2 and the run rate is likely to grow further), b) anticipated recovery in Healthcare by Q4-end, and c) robust deal intake/pipeline. BFS is expected to maintain growth trajectory, aided by strong momentum across segments (mortgage, collection and UK retail and commercial banks), macro tailwinds and healthy deal wins. Healthcare is expected to revive in the next few quarters (payer showing good traction, while a recovery expected in provider by Q4). It added 15 clients in Q3 (11 in BFS, including 9 in mortgage; 4 in Healthcare, including 2 in provider). Top client rebounded sharply (32.2% QoQ) and FSOL expects YoY growth to return by Q4-end.


Assume coverage on Firstsource Solutions with Buy and TP of Rs90: Low interest rates in the US should drive refinance volumes and new home sales in the foreseeable future, which should augur well for FSOL given its comprehensive offerings in BFSI. We believe that anticipated acceleration in revenue growth momentum, stability in margins, strong consistent execution, delivery on guidance and strong cash generation would support high valuations. We assume coverage on FSOL with Buy and a TP of Rs90 at 12x Sept’22E earnings.


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