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Growth outlook improves, margin trajectory intact

FSOL delivered an in-line Q2FY27 performance, with rev. growth of 2.0% QoQ CC and EBIT margin of 12.5%. Revenue growth was led by BFS (+9.9% QoQ) and EMEA (+6% QoQ), while Healthcare declined 1.6% QoQ, due to delay in program ramp ups and transitions. Management indicated that the impact of the healthcare project cancellation (~ 1.5% of FY27E rev.) and payer program wind-down is largely behind, with new client additions and scope expansions supporting recovery prospects. Deal momentum remained strong, with 4 large deal wins (7th consecutive qtr. of 4+ wins), including 2 from new logos. Headcount addition by 3.06k was strong (highest since Q2FY25) largely in anticipation of deal ramp-ups and transition of a major banking client, with over 85% of incremental hiring in India and the Philippines. Management expects H2FY27 to outperform H1, supported by large-deal ramp-ups, strong hiring, improving conversion and robust pipeline. Accordingly, the company raised the lower end of its FY27 CC rev. growth guidance to 10.5% from 10% earlier, retaining the upper end at 13%, while maintaining EBIT margin guidance of 12.25–12.75%. EBIT margin expanded 10bps QoQ to 12.5% despite the first phase of wage hikes and costs of onboarding employees ahead of revenue. Continued offshore/nearshore delivery, AIled productivity and operating efficiencies support the margin trajectory towards FSOL’s medium-term aspiration of 15%. With strong H1 execution and improving growth visibility, we raise our FY27E/FY28E revenue CC growth estimates to 11.5%/10.9% from 11.1%/10.5%, respectively, while retaining FY29E estimates. We also raise our FY27E/FY28E/FY29E EBIT margin estimates by 30bps each to 12.5%/13.0%/13.3% respectively, factoring in strong H1 performance. We continue to value the stock at 18x Sep. 28E earnings to arrive at TP of INR 350 and maintain our BUY rating.

Revenue:

FSOL in Q2 reported revenue of US$296mn, up 2.0% QoQ CC & 2.8% in USD terms, in line of our estimate. Segment-wise, BFS & CMT grew by 9.9% & 2.8% QoQ respectively while Healthcare & Diverse declined by 1.6% & 4.2% QoQ respectively. Geography wise, North America & EMEA grew by 1.5% & 6% QoQ respectively, with EMEA growth mainly being led by strong BFS performance, and good momentum emerging in CMT.

Operating Margin:

FSOL reported Q2 EBIT margin of 12.5%, up 10 bps QoQ (8th consecutive quarter of margin improvement) and in line of our and consensus estimates, despite rolling out the first phase of wage hikes. Management is expecting 50-75bps of margin improvement to continue to play out over the next couple of years.

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