Investors can continue to hold the shares of Firstsource Solutions. The stock offers potential for moderate capital appreciation due to reasonable business prospects and its valuations. At Rs 80, the stock trades at 19 times current year earnings and about 14 times its estimated 2008-09 earnings. This is at a premium to other business process outsourcing players in the Indian listed space, such as Allsec Technologies and Cambridge Solutions.
But Firstsource's revenues and margins are higher, and it appears well-placed for significant scalability compared to its peers; this provides justification for valuations that are close to tier-two IT players. EXL Services and WNS, Firstsource's peers listed in the US, are trading at 25 and 50 times their trailing earnings, respectively, despite their lower operating profit margins.
Firstsource is a pure-play BPO services provider, catering to clients in the banking, financial services & insurance, healthcare and telecom/media sectors. Voice and transaction processing services contribute almost all of its revenues. Forecasts from Nasscom suggest that business and knowledge process outsourcing services may manage stronger growth rates in the coming years than traditional application development IT services. A player such as Firstsource may be well-placed to gain from any heightened outsourcing wave from the US and Europe.
Business Drivers
MedAssist acquisition holds promise: Firstsource completed the acquisition of MedAssist, a revenue cycle management company in the healthcare sector, recently. This acquisition is strategic as MedAssist is estimated to have over 800 hospitals as its clients in the US and would give Firstsource an expanded client base.
Also, Firstsource, which has a significant client base in the Insurance segment, will now be able to be on the payer as well as the claim management space, thus offering a complete chain of integrated services. MedAssist is already EBITDA accretive to Firstsource and may be expected to increase its contribution to realisations over time. Payoffs from this have not been factored into our earnings estimates.
Domestic and telecom exposure
The revenues from back office operations for Hutch, now Vodafone, have started to flow in for the company. With the hurdles to the Vodafone-Essar deal now cleared, Vodafone has embarked on customer acquisition ramp-up; this suggests that revenues for the company from Hutch may pick up in volume.
Considering that India also is the fastest growing telecom market, Firstsource appears well-placed to capture fresh market share from deals with other operators, for instance, any vendor rationalisation exercise by the likes of Bharti Airtel.
Global delivery model
The company has 24 delivery centres, which is a high number for BPO players. This spread allows Firstsource to deliver a mix of offshore, onsite and near shore services, thus optimising costs and margins. Some of these centres are in strategic low-cost destinations such as Argentina and the Philippines (a preferred outsourcing destination for many players) with sufficient manpower availability.
This may also help cater to clients who may be more comfortable with these destinations because of data-security fears or sensitivities expressed in outsourcing to India.
Metavante Partnership
Firstsource's partnership with Metavante, an IT player catering to banking clients, to tap North American markets seems to have worked in its favour. This partnership has helped the company to win several deals from top-tier banking and financial services clients. In view of the sub-prime crisis and fears of slowdown, this partnership may bring in expertise for targeted client-mining.
Operational parameters
The company has a repeat business proportion of over 94 per cent. This compares favourably even with mostIT players and may be indicative of reasonable service quality levels. An increase here may also, over time, help Firstsource to reduce selling and marketing expenses. An improving revenue mix — both in terms of geography and verticals — is a healthy indication.
Although telecom and media and BFSI contribute 79 per cent of revenues at present, healthcare is also showing increasing contribution. The company hopes each of these verticals to contribute to one-third of its revenues, thus reducing concentration. The increasing domestic contribution (13.2 per cent) to revenues may also provide relief against any further depreciation of the dollar against the rupee.
Risks
Attrition, at 54 per cent, is higher than the sector norm and constitutes a very significant execution risk. With more captive units becoming third party BPOs to broadbase their offerings, they could pose a threat to the company's market share.
Given the high growth prospects, pricing and competitive pressures from existing players in this segment such as Office Tiger, WNS, Genpact, and EXL Services looking to capture markets is a distinct possibility.
Last, top tier/second-rung players in IT services are making a significant foray into BPO/KPO services by way of outsourcing deals that have such a component. This may cut into the overall pie for players such as Firstsource
But Firstsource's revenues and margins are higher, and it appears well-placed for significant scalability compared to its peers; this provides justification for valuations that are close to tier-two IT players. EXL Services and WNS, Firstsource's peers listed in the US, are trading at 25 and 50 times their trailing earnings, respectively, despite their lower operating profit margins.
Firstsource is a pure-play BPO services provider, catering to clients in the banking, financial services & insurance, healthcare and telecom/media sectors. Voice and transaction processing services contribute almost all of its revenues. Forecasts from Nasscom suggest that business and knowledge process outsourcing services may manage stronger growth rates in the coming years than traditional application development IT services. A player such as Firstsource may be well-placed to gain from any heightened outsourcing wave from the US and Europe.
Business Drivers
MedAssist acquisition holds promise: Firstsource completed the acquisition of MedAssist, a revenue cycle management company in the healthcare sector, recently. This acquisition is strategic as MedAssist is estimated to have over 800 hospitals as its clients in the US and would give Firstsource an expanded client base.
Also, Firstsource, which has a significant client base in the Insurance segment, will now be able to be on the payer as well as the claim management space, thus offering a complete chain of integrated services. MedAssist is already EBITDA accretive to Firstsource and may be expected to increase its contribution to realisations over time. Payoffs from this have not been factored into our earnings estimates.
Domestic and telecom exposure
The revenues from back office operations for Hutch, now Vodafone, have started to flow in for the company. With the hurdles to the Vodafone-Essar deal now cleared, Vodafone has embarked on customer acquisition ramp-up; this suggests that revenues for the company from Hutch may pick up in volume.
Considering that India also is the fastest growing telecom market, Firstsource appears well-placed to capture fresh market share from deals with other operators, for instance, any vendor rationalisation exercise by the likes of Bharti Airtel.
Global delivery model
The company has 24 delivery centres, which is a high number for BPO players. This spread allows Firstsource to deliver a mix of offshore, onsite and near shore services, thus optimising costs and margins. Some of these centres are in strategic low-cost destinations such as Argentina and the Philippines (a preferred outsourcing destination for many players) with sufficient manpower availability.
This may also help cater to clients who may be more comfortable with these destinations because of data-security fears or sensitivities expressed in outsourcing to India.
Metavante Partnership
Firstsource's partnership with Metavante, an IT player catering to banking clients, to tap North American markets seems to have worked in its favour. This partnership has helped the company to win several deals from top-tier banking and financial services clients. In view of the sub-prime crisis and fears of slowdown, this partnership may bring in expertise for targeted client-mining.
Operational parameters
The company has a repeat business proportion of over 94 per cent. This compares favourably even with mostIT players and may be indicative of reasonable service quality levels. An increase here may also, over time, help Firstsource to reduce selling and marketing expenses. An improving revenue mix — both in terms of geography and verticals — is a healthy indication.
Although telecom and media and BFSI contribute 79 per cent of revenues at present, healthcare is also showing increasing contribution. The company hopes each of these verticals to contribute to one-third of its revenues, thus reducing concentration. The increasing domestic contribution (13.2 per cent) to revenues may also provide relief against any further depreciation of the dollar against the rupee.
Risks
Attrition, at 54 per cent, is higher than the sector norm and constitutes a very significant execution risk. With more captive units becoming third party BPOs to broadbase their offerings, they could pose a threat to the company's market share.
Given the high growth prospects, pricing and competitive pressures from existing players in this segment such as Office Tiger, WNS, Genpact, and EXL Services looking to capture markets is a distinct possibility.
Last, top tier/second-rung players in IT services are making a significant foray into BPO/KPO services by way of outsourcing deals that have such a component. This may cut into the overall pie for players such as Firstsource
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