Published on 26/10/2020 12:57:01 PM | Source: HDFC Securities Ltd

Buy Firstsource Solutions Ltd For Target Rs.89 - HDFC Securities

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Buy Firstsource Solutions Ltd For Target Rs.89  - HDFC Securities


Our Take:

Firstsource Solutions Ltd (FSL) is well positioned to strengthen client’s business processes, increase productivity and drive revenue growth with expertise in Analytics, Intelligent Automation (IA), Agent Productivity and enhancing customer experience. This expertise will prove to be beneficial to drive operational efficiencies, gaining market share and maintaining relationship with customers. Company with its diversified, well-balanced portfolio along with geo-delivery mix and continued focus on digital will help it to emerge stronger.

FSL has been consistently focusing on improving its operational efficiency which has resulted in a 300 bps margin expansion over last 5 years. Going forward, we expect company’s growth trajectory to improve which would be driven by increased contribution from top client, new logo wins in BFS & media & communication, traction in UK BFS & retail business and improvement in mortgage business. Also, the strategy of increased penetration in technology segment, cross selling of platforms business and hiring of leaders could boost its digital business. Further, we expect healthy traction in margins to continue in coming quarters.

FSL added 10 new logos including one strategic deal with a top 20 healthcare player in Q1FY21. FSL continues to focus on efforts to improve sales momentum on a continuous basis and its renewed strategy augurs well towards adding stability and drivers to revenue profile. Company incurred capital expenditure of Rs 90 crore mainly towards refurbishment and maintenance of operation centers, technology upgrade and setting up of new operation centers.


Valuations and View:

FSL is a provider of a range of business process management services across the customer life cycle delivered through transaction processing. Company is focused in industries like Banking & Financial Services, Healthcare, Communications, Media& Tech. These industries are engaged with structural changes brought about their technology, changing consumer preferences, regulatory policy and off late macroeconomic factors catalysed by the pandemic. Company has built structured client relationships and a solid domain foundation over the years and this could provide a competitive advantage to FSL.

Taking into consideration of steady operating performance with a rise in profitability, comfortable capital structure, healthy cash accruals and expectation of positive cash flow from operations going ahead on a sustained basis, we have a positive view on the stock. We remain optimistic on its revenue and profitability trajectory as well as cost rationalisation efforts going forward. FSL seems to be in the early period of a sustainable improvement in financial performance. We think that FSL can now get higher than average P/E that it has got in the past. Investors could buy the stock at LTP and add on dips to Rs. 65(9.5xFY22E EPS). We feel the Base case fair value of the stock is Rs. 82 (12.0xFY22E EPS) and the Bull case fair value is Rs. 89 (13.0xFY22E EPS). At the CMP of Rs 73.4 the stock trades at 10.8x FY22E EPS.


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