Recommendation from BPO/ITeS Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

FIRSTSOURCE SOLUTIONS: IN TUNE WITH EXPANSIVE OPPORTUNITIES

HERE IS WHY
✓Global growth potential
✓Rise in net profit
✓Building vertical capabilities

The IT and business process management (BPM) sector has emerged as one of India’s most important economic drivers with a significant influence on the GDP and national welfare. The IT sector generated 7.4 per cent of India’s GDP in FY22 and it is expected to contribute 10 per cent by 2025. Owing to the opportunities in IT and BPM segment, our low price scrip recommendation for this issue is Firstsource Solutions Ltd. The company is a part of the RP-Sanjiv Goenka Group and is a leading global provider of BPO services through end-to-end client lifecycle management across many business verticals, including communications, media and technical (CMT), financial services and healthcare.

During FY22, the verticals of CMT, financial services and healthcare contributed 49 per cent, 29 per cent and 19 per cent of the company’s revenue, respectively. The company has 43 worldwide delivery centres located in India, the United States, Europe, Mexico and the Philippines. FSL provides commercial and retail banking clients with a variety of solutions and operates in segments such as retail and SME banking, mortgages, collection and recoveries, complaints and remediation, commercial finance and fintech

The healthcare vertical of the company serves clients in both the provider and payer segments of the healthcare industry. It has collaborated with over 1,000 hospitals and five of the top ten health insurance companies in the United States. In Q3FY23, FSL reported consolidated revenue of ₹1,504.90 crore, increasing by 2.81 per cent YoY from ₹1,463.81 crore while it stood flat sequentially. Slowdown in mortgage business, slower ramp-up in the collections business and slower decision-making in healthcare deals impacted the revenue growth. Its EBITDA, however, saw a better growth of 14.29 per cent to ₹272.16 crore on a yearly basis, while sequentially it increased by 12.88 per cent. 

The net profit for Q3FY23 stood at ₹157.92 crore, showing YoY growth of 16.58 per cent, while sequentially it increased by 22.03 per cent. The EBITDA margin increased by 182 bps YoY and 188 bps QoQ and stood at 18.1 per cent. The net profit margin grew by 124 bps YoY and 180 bps QoQ and stood at 4.4 per cent. The improvement in margin was due to cost rationalisation activities. The management has indicated that 70 per cent of the improvement is sustainable. During the quarter, the management of the company indicated that its growth in the medium term will be driven by building adjacent vertical capabilities, acquiring new clients and growing strategic accounts. 

The company also plans to diversify its BFS business and continue to grow its health and CMT verticals to make the company’s business less cyclical. At TTM, FSL is trading at a PE of 15.6 times which is slightly lower compared to its three-year median PE. The valuation also looks cheaper when compared with the average industry PE of 30.4 times. The company is trading at 2.39 times its book value and has a PEG ratio of 1.10 times, which looks attractive. The company’s three-year compounded sales and profit growth stand at 15.67 per cent and 12.46 per cent, respectively. The company has achieved an average (three-year) ROE and ROCE of 14.73 per cent and 15.35 per cent, respectively. It has maintained a healthy average (five-year) CFO and PAT of 1.44 times. Owing to all the above factors, we recommend BUY.