Monday, May 11, 2009

>Firstsource Solutions Ltd. (MERRILL LYNCH)

Not out of the woods, yet

Maintain Underperform post Q4FY09
Post Q4 results and management discussions, we maintain our Underperform and modify estimates. Stock trades at 10x FY10 PE and over 16x FY10 PE, if one adjusts for imputed interest on FCCB. We will look for stability in Credit Card collections (~10% of revs) and healthcare (~40% of revs, mainly eligibility services & collections) and progress in FCCB buyback before we would consider reevaluating our rating. Impact of Fidelity National Information Services buying shareholder and business partner, Metavante, an uncertainty. Our PO of Rs15 at ~10x FY11 adj. EPS, treating FCCB as debt.

4Q FY09 operations in line, adj. profits below BAS-MLe
Revenue 8% higher than BAS-MLe, led by Credit Card collections. Apart from seasonal strength, FSOL also benefited from some commission hikes & higher productivity of collectors. US healthcare services continued to see payment delays, as govt. focuses on improving efficiency of monies spent on healthcare programs. Likely pricing pressure from hospitals too. EBITDA margins 67bps below BAS-MLe. Adjusted for non-recurring gain on FCCB buy back and 1-time expenses, profits at Rs102m vs BAS-MLe at Rs224m due to higher interest cost & forex losses.

Rev challenges persist
We believe while worst may be behind in the collections business, it is still early to assume any improvement in liquidation rates. Outlook in healthcare services still murky, with delayed payments as US govt. looks to step up efficiency of healthcare programs & some states cap enrollment services/trim svc coverage. Also see risk of pricing cuts from hospitals/other clients.