Reduce Firstsource Solutions Ltd for the Target Rs 270 by Emkay Global Financial Services Ltd
Firstsource (FSOL) posted a largely in-line operating 1Q show. Revenue grew 1.8% qoq to $288mn (2.2% CC), a tad below our estimate. EBITM expanded by 20bps qoq to 12.4%, slightly above our estimate. FSOL signed 4 large deals (each with ACV of >$5mn) and added 12 new logos in 1Q (including 3 strategic logos). Management retained its FY27 CC revenue growth guidance of 10-13% (implying CQGR of 1.7-3.5% in 2Q-4Q) and EBITM of 12.25-12.75% (targeting 14-15% in next 2-3Y). Despite a 1-1.5% hit from a large healthcare BPaaS deal being terminated, FSOL retained its revenue guidance backed by strong deal intake (largest ACV win in 1Q in last 4 quarters; >1/3rd of deal-wins from healthcare in 1Q), healthy pipeline (>$1bn), new logo wins momentum. We cut FY27E EPS by ~5% while raising FY28/29E EPS by ~3%, factoring in the 1Q performance. We revise up our TP by ~8% to Rs270 from Rs250, based on 16x Jun-28E EPS; however, we downgrade the stock to REDUCE from Add, given the limited near-term upside following the 18%/21% return in the last 1M/3M.
Results summary
Revenue grew 1.8% qoq to $288mn (2.2% CC), a tad below our estimate of $290mn. EBITM expanded by 20bps qoq to 12.4%, slightly above our estimate of 12.3%. Reported PAT was Rs1.7bn (Emkay: Rs2.3bn). This was mainly due to a Rs717mn exceptional item, comprising BPaaS contract termination provision, indemnification of regulatory penalty to a customer on non-fulfilment of contractual performance, and fair value adjustment on contingent consideration payable for Ascensos (acquisition). Headcount rose 1.9% qoq to 36,875. What we like: Strong growth in CMT/EMEA, healthy deal pipeline. What we do not like: Weak Healthcare, poor cash conversion (OCF/EBITDA: ~22%).
Strong growth trajectory in CMT, BFS, and EMEA
Revenue growth was led by CMT (9% qoq in CC terms) and BFS (5%), partially offset by Healthcare (-2%), while growth at Diverse Industries was flat. Among geographies, growth in North America (NA) was flat sequentially (CC), while that in EMEA grew 6%.
Earnings call KTAs
1) BFS added 5 new logos given strong demand across collection (elevated US consumer debt) and mortgage (AI-led cost optimization/transformation). Exit pipeline is healthy.
2) Healthcare added 4 new logos, aided by continued AI adoption in payer and provider operations. It remains key growth pillar, though Medicare Advantage programs saw nearterm hit of CMS pricing adjustments and program recalibration. A mid-market healthcare client terminated a BPaaS contract (1-1.5% hit), though management indicated that client relationship continues and that it remains a strategic logo (>$5mnpa revenue).
3) CMT added 2 new logos, with growth remaining inherently volatile in consumer tech due to the timing of work packets and program transitions. Telecom and cable clients are exploring AI-led improvements across customer service, agent productivity, and service assurance.
4) Diversified industries added one new logo, with stable demand in utilities and retail focus on CX, personalization, and cost optimization.
5) North America delivered broad-based growth, supported by Canada expansion and replication of UK capabilities in the US.
6) Transformational deals have longer ramp-up timelines, leading to slower near-term revenue conversion but enhancing long-term growth visibility.
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