Wednesday, February 8, 2012

>FIRSTSOURCE: Strong deal closures improve FY13 visibility

 Retain Buy on attractive valuation, new PO Rs15
Firstsource saw impressive deal closures during Q3 that increase visibility into FY13 revenue growth. Additionally, we expect company’s EBIT margins to increase nearly 230bps in FY13 on benefits from improved efficiency in execution and operating leverage from revenue growth. We lower adj. FY13/14 EPS by 7% baking in higher transition costs related to deal wins and increased interest outgo. Retain Buy with new Rs15 PO (target 6.5xFY13 adj. EPS) on attractive valuation. Improved op margin, successful refinancing could be next stock triggers.

■ Q3 operating profit ahead of expectation
Revs grew ~1%qoq, 5% ahead of our est with seasonal softness in collections more than offset by ramps in recent deal wins. EBIT was 6% ahead of est led by rev beat but declined 15%qoq on increased transition costs. A1-x loss of Rs71m related to FCCB buy-back led to 68%qoq decline in reported PAT.

■ Impressive pipeline conversion, led by telecom
Company announced 3 deal closures in the telecom segment, worth US$160m & should help post 10% rev growth in FY13 (constant currency terms). We also factor ~150bps op margin improvement from its ongoing restructuring efforts. Collections (10% of rev) remain chief drag on op performance with decline seen in collectible volumes. Forecast FY13 EBIT to grow 94%yoy from low-base of FY12.

■ Cash shortfall of ~US$65-70m appears manageable
Towards ~US$237m of FCCB redemption in Dec 2012, company has a cash chest of ~US$130m and is likely to generate another US$35-40m from normalizing of receivables and free cash from operations. Financing the shortfall of ~US$65-70m appears manageable with Net Debt / EBITDA estimated at ~4x.

To read the full report: FIRSTSOURCE