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Weak collections business performance to impact near term revenues

About the stock: Firstsource Solutions (FSL) provides business process services to BFSI, Communication, Media, Tech and Healthcare

* The company generates 49% revenues from BFSI while healthcare and communication form 30% and 20%, respectively

* FSL has witnessed healthy revenue improvement (up 19% YoY in FY21)

Analyst day highlights:

* The company reiterated its revenue guidance of 14.5-15.5% in FY22, cut downwards from its earlier guidance range of 15-18%

* EBIT margin guidance maintained at 11.8-12.3%

* Weakness in collections business in the US is one of the drivers of a cut in revenue guidance for FY22

* The company acquired US based firm ‘StoneHill’, which focuses on loan quality control, due diligence and loan origination services for US$27 mn

What should investors do? FSL’s share price has grown by ~5.7x over the past five years (from ~| 30 in November 2016 to ~| 173 levels in November 2021).

* We maintain HOLD rating

Target Price and Valuation: We value FSL at | 180 i.e. 19x P/E on FY23E EPS

Key triggers for future price performance:

* Improvement in provider, collection segment, diversification in CMT segment, new logo wins, focus on client mining cross selling of platforms business and hiring of leaders bodes well for long term revenue growth

* The company closed one large deal recently with a health insurance company, under which the company will replace with modern integrated software and services solutions

* The company faces high attrition, especially on the onshore side. Controlling the same can boost its financials

Alternate Stock Idea: Apart from FSL, in our IT coverage we also like Infosys.

* Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompts us to be positive

* BUY with a target price of | 2,060

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