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Robust revenue growth…

Firstsource Solution (FSL) reported a healthy set of Q3FY21 numbers. Dollar revenues increased 15.6% QoQ (up 24.9% YoY) led by healthy growth in top client, 15.9% QoQ growth in BFS and 26.1% QoQ growth in communication, media and technology (CMT). In rupee terms, revenues increased 29.6% YoY, 14.9% QoQ. EBIT margins increased 20 bps QoQ to 11.6%. Total debt declined from | 843.3 crore in FY20 to | 505.4 crore in 9MFY21. FSL has guided 16-17% YoY growth (up from earlier guidance of 9-12%) in FY21E revenues in constant currency terms and operating margins in the range of 11.25-11.5%.

Traction in mortgage, provider, top client to drive growth

The company has seen an improved market share in top client. We expect this trend to continue, going forward. Apart from traction in top client, healthy growth in media & e-commerce (added one US ecommerce client in the current quarter) will drive CMT revenues. This, coupled with improving UK BFS and mortgage business (led by refinancing, new home sales & delinquencies) is expected to drive the BFS business. Further, we expect the healthcare segment to witness improved traction led by acquisition of PatientMatters (cross sell opportunities), ramp of large deal win (US$22 million over five years), traction in tele health & self pay and improved growth in provider segment. In addition, FSL has seen healthy client wins of 18 new clients taking total client addition to 43 in 9MFY21 and has seen healthy headcount addition (up 3x in 9MFY21) indicating robust demand in coming quarters. Further, FSL’s strategy of increased penetration in technology segment, cross-selling of platforms business, increase in deal size and hiring of leaders to boost its digital business will be long term drivers of revenues for the company. Hence, we expect FSL’s dollar revenues to increase at a CAGR of 13.6% in FY20-23E

Margins to improve marginally in coming years

FSL is investing in leadership, improving talent capabilities, hiring & training and sales, which is expected to act as margin headwind in the near term. However, traction in outcome based provider revenues, improvement in digital segment, higher offshoring and revenue growth will offset the headwinds. Consequently, we bake in 137 bps improvement in EBIT margins to 12.2% over FY20-23E.

Valuation & Outlook

Healthy growth in mortgage business, improvement in provider segment, traction in top client, healthy deal pipeline, new client wins, cross-selling of platforms business and hiring of leaders to boost its digital business are expected to drive long term revenues. This, coupled with improving margins, prompt us to maintain BUY on the stock with a target price of | 120 (14x PE FY23E EPS) (earlier target price | 84/share).

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