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In-line operating performance

* FSOL’s Q1 operating performance was in line with expectations. Revenues grew 0.7% QoQ to USD201.3mn (0.5% QoQ/38.5% YoY CC). The softness in the top client account and the mortgage business kept revenues flat QoQ. EBITM declined 30bps QoQ to 12.1%.

* Healthcare revenues grew 9.8% QoQ, led by solid momentum in the HPHS business. BFSI grew 1% QoQ, driven by growth in UK BFS. CMT fell 3.9% QoQ due to the weakness in the top client account stemming from the temporary supply-side impact of the second Covid wave in India and demand softness.

* FSOL reiterated its FY22 revenue growth guidance of 15-18% CC, implying -0.3% to 1.3% CQGR over Q2-Q4. It expects the weakness in the mortgage refinancing business to be partly negated by the recovery in healthcare and other BFS businesses. FSOL expects EBITM to be in the range of 11.8-12.3%.

* We cut FY22-24E EPS by 0.6-1.4%, factoring in Q1 performance and cash outgo related to the option purchase agreement with a mortgage client. Retain Hold rating with a TP (Jun’22E) of Rs210 at 21x Jun’23E EPS.

What we liked?

Solid growth in the healthcare business; 17 new clients added

What we did not like?

Softness in the top client account and weak cash generation.

Healthcare drives growth; retains 15-18% CC growth guidance in FY22:

Revenues grew 0.7% QoQ and 43.1% YoY to USD201.3mn, in line with our estimates. In the mortgage business, the company indicated that the new home purchase market remains strong while refinancing volumes have started to moderate. FSOL reiterated 15-18% CC revenue growth guidance for FY22, implying flat sequential growth over Q2-Q4. Management remains confident about offsetting potential headwinds from the weakness in the mortgage business through: 1) strong traction in UK BFS, led by volume growth and expansion into new service lines and recovery in the collections business; 2) strong growth traction in the HPHS business and anticipated recovery in the provider business (by Dec-end); 3) healthy client additions (17 in Q1); and 4) traction in media and ‘born-digital’ clients. Management expects the mortgage business to deliver low-double digit growth in FY22, implying mid-single digit CQGR decline over Q2-Q4. Revenues from the top client declined 5% QoQ due to the supply-side issues on account of the second Covid wave in India and demand softness. FSOL expects revenues from the top client to remain soft in Q2 and stabilize in H2.

EBITM to be in the 11.8-12.3% range in FY22:

EBITM declined by 30bps QoQ to 12.1%, 20bps below our estimates. FSOL expects FY22 EBITM to be in the range of 11.8-12.3% (flat to 50bps YoY expansion), considering the anticipated rebound in the profitable provider business and operating leverage. Over the medium term, the company targets to expand its margins by 40-50bps every year, aspiring to operate at mid-teens margin levels.

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