Firstsource Solutions

Investors can retain their share holdings in Firstsource Solutions, a BPO player, considering the company's healthy vertical and geographic mix, the revival in the deal momentum and benefits that accrue from macro trends such as vendor rationalisation by clients.
At Rs 34, the share trades at 17 times its likely 2009-10 per share earnings. This is at a premium to most mid-tier IT companies, but at a steep discount to peers such as WNS and EXL Services. These two companies are listed in the US and trade at over 43 times earnings. Firstsource generates revenues at higher operating margins (close to 15 per cent) than these players.
With operations stabilising in verticals such as banking and financial services and client ramp-ups witnessed over the next two years, there may be sufficient room for capital appreciation.
The company had a challenging 2008, with pricing cuts and declining volumes and losses due to FCCB borrowings on the back of a depreciating rupee, but seems to have witnessed significant revival in volumes and stable pricing over the last three quarters. FCCB losses have also come down significantly.
For the first half of this fiscal, the company's revenues grew 16.8 per cent to Rs 973.2 crore, while from a loss in the first half of last fiscal, the company posted net profits of Rs 67.1 crore this time around.
In FY-09, Firstsource had seen its revenues grow by 33 per cent over FY-08 to Rs 1,749.4 crore, while net profits fell by 77 per cent to Rs 30.7 crore.
Client ramp ups
Firstsource derives its revenues from three verticals — healthcare, telecom and media and BFSI — by providing voice and transaction processing services. From excessive dependence on BFSI two-three years ago, the company now has a fairly healthy mix of revenues generated from verticals. Healthcare accounts for 37.6 per cent of revenues, while telecom and BFSI contribute 38.1 per cent and 22.4 per cent respectively. MedAssist, the US- based revenue cycle management company in the healthcare sector, that it acquired a couple of years ago, has enabled it to tap and expand its client base.
With the healthcare reform legislation on the anvil in the US, there is expected to be an expansion of Medicaid, a healthcare programme for low-income groups that would require high enrolment services, an area which is Firstsource's key competency.
The company has witnessed a ramp up in revenues from its top five customers over the last three quarters, suggesting that volumes are starting to revive. Reinforcing this fact is the momentum in new deal wins by Firstsource such as that signed with a large telecom player in the UK and domestically with Idea Cellular.
Macro benefits
In the UK, the highly successful iPhone, with its high-end features and value-added services, is being used as key means by players to drive realisations.
With Vodafone, a leading player there, also recently joining the race, the subscriber base is set to ramp up. With its existing presence and association with key telecom players in the UK market, Firstsource appears well set to benefit from increase in back-end work volumes.
This apart, vendor consolidation undertaken by large clients in the US and the UK has been favourable to Firstsource, giving it more business.
In its BFSI vertical, which is stabilising, there is ramp up in volumes in the key collections segment as a result of delinquencies of the US- and UK-based customers. The company has won a new client which gives it entry into the relatively safer prepaid cards segment.
The company also derives over 12 per cent of its revenues from India, a key growth market for BFSI and telecom verticals. The deal signed with Idea Cellular reiterates this point. With many new players coming into the market and looking to rollout services quickly, outsourcing of back-end work would be a strategy, resulting in opportunities that players such as Firsrsource are well-placed to tap into.
A recent IDC report states that India's domestic BPO market is set to grow at 33.3 per cent annually from $1.62 billion recorded in 2008 to revenues of $6.82 billion by 2013. This is expected to be led by BFSI, telecom, utilities, travel and hospitality segments.
Rupee appreciation against the dollar beyond the levels of Rs 45, at which the company is hedged, could pressure realisations. Although most Tier-1 IT companies have indicated that pricing pressures have abated, the situation with mid-Tier IT and BPO companies is still unclear.
via BL