Reduce Firstsource Solutions Ltd For Target Rs.95 - ICICI Direct
About the stock: Firstsource Solutions (FSL) provides business process services to BFSI, communication, media, tech and healthcare
* The company generates 70% revenues from the US and 27% from the UK
* FSL is a domain driven BPM company, which has 150+ clients, including 17 Fortune 500 companies and nine FTSE 100 companies. The company has 26,557 employees across the US, UK, India and Philippines
Q1FY23 Results: FSL reported weak numbers.
* US$ revenues declined 5.1% QoQ in CC terms and 7.1% in dollar terms
* EBIT declined ~340 bps QoQ to 8%
* Revenue guidance revised downward to 2-4% in CC for FY23
What should investors do: FSL’s share price has grown by ~3.1x over the past five years (from ~| 34 in August 2017 to ~| 105 levels in August 2022).
* We change our rating from HOLD to REDUCE
Target Price and Valuation: We value FSL at | 95 i.e. 12x P/E on FY24E.
Key triggers for future price performance:
* Recovery in refinancing and collections volumes, which has been a weak link in the performance. We expect dollar revenues to increase at a CAGR of 4.4% in FY22-24E
* Inorganic opportunities in adjacent capabilities may help to address the growth concerns
* Margin recovery due to cost rationalisation programmes. We expect EBIT margins to decline 130 bps in FY22-24E
Alternate Stock Idea: Apart from FSL, in our IT coverage we also like Persistent.
* Consistent growth aided by continued strong TCV and inorganic opportunities
* BUY with a target price of | 4,200
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