Buy Firstsource Solutions Ltd For Target Rs.220 - Emkay Global
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Weak quarter; upgrade to Buy on attractive valuation
* Q2 operating performance missed expectations due to a ~5% miss on revenue. Revenues declined 4.1% QoQ to USD193mn (-4% CC). The softness in the top client, collection and mortgage business led to the revenue miss. EBITM expanded by 40bps QoQ to 12.5%.
* FSOL cut its FY22 revenue growth guidance to 14.5-15.5% CC YoY (organic 13.9%- 14.8% vs. earlier 15-18%), owing to lower-than-anticipated volume in the collection business amid record-low delinquency rates and continued softness in the provider business. It retained the EBITM guidance range of 11.8-12.3%.
* Healthcare revenues grew 6.3% QoQ, led by solid momentum in the HPHS business. BFS declined 9.3% QoQ due to weakness in mortgage and collection. CMT fell 4.6% QoQ due to weakness in the top client affected by supply-side challenges and lower demand.
* We cut FY22-24E EPS by 0.4-0.9%, factoring in the Q2 miss and TSG acquisition. The stock has corrected 15%/5% in last 1M/3M. In our view, the performance miss was largely due to temporary factors, and growth should bounce back strongly from Q4FY22. The stock may consolidate in the near term due to the lack of immediate catalysts. Considering attractive valuations, we upgrade FSOL to Buy with a TP of Rs220 at 21x Sept’23E EPS.
What we liked? Strong growth in the HPHS business, a large deal (USD110mn TCV) won in HPHS, healthy cash conversion (~102% OCF/EBITDA), 15 new clients added.
What we did not like? Guidance cut, softness in top client, provider and collection business.
Payer business retains growth momentum, others falter; cut FY22 CC revenue growth guidance to 14.5-15.5%: Revenues declined 4.1% QoQ but grew 20.8% YoY to USD193mn, missing our estimates. FSOL lowered its FY22 revenue growth guidance to 14.5-15.5% CC YoY (organic 13.9%-14.8% vs. earlier 15-18%), owing to lower-than-anticipated volume in the collection business amid record-low delinquency rates and continued softness in the provider business. Management expects flat revenue performance in Q3 and revenue growth to bounce back strongly from Q4 onward on the back of a large deal ramp-up, healthy client additions (15 in Q2), recovery in the provider business and contribution from The StoneHill Group (TSG). FSOL expects the mortgage business to deliver growth in high-single digits to low-double digits in FY22. Revenues from the top client declined 7.1% QoQ due to supplyside issues and demand softness, as with the economy opening up, people resumed social and outdoor activities/travel which led to lower consumption of telecom/media services. FSOL expects revenues from the top client to recover in H2.
EBITM to be in the 11.8-12.3% range in FY22: EBITM expanded by 40bps QoQ to 12.5%, 50bps above our estimates. FSOL expects FY22 EBITM to be in the range of 11.8-12.3% (flat to 50bps YoY expansion), considering the growing offshore mix, an anticipated rebound in the profitable provider business and operating leverage negating supply-side challenges. The company aspires to expand margins by 40-50bps every year and gradually reach mid-teens margin levels in the medium term.
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