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Firstsource Solutions Equity Research

HomeCompanyFirstsource Solutions Equity Research

Date of Research – 14 January 2016

Price – Rs. 38.25

About the Company

Founded in 2001, Firstsource Solutions Limited (“Firstsource Solutions” or the “Company”) is a provider of Business Process Outsourcing services headquartered in Mumbai, Maharashtra, India. Firstsource provides consulting services with outsourcing solutions to organizations in the Healthcare, Communication, Publishing, Banking, Financial Services and Insurance industries. The Company has three segments: banking, financial services and insurance and non – banking.

Its business is organized into four geographic segments: United States of America and Canada, United Kingdom, India and worldwide. It focuses on and has Banking, Financial Services and Insurance; telecommunications and media, and healthcare. Within the Telecommunications and Media vertical, it operates across four key sub segments including mobile/wireless, fixed/wire-line, broadband/Internet, and direct-to-home/pay-TV. Within the BFSI vertical, it operates across four sub segments, including cards, mortgages, general insurance and retail banking.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 
Total Income from Operations 2,818.54 3,105.88 3,034.65 3,230.29 3,555.61 
Expenses 2,538.97 2,743.75 2,653.89 2,825.48 3,117.62  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 279.56 362.13 380.76 404.81 437.99  
Depreciation 88.40 75.70 72.18 66.20 58.96  
Finance Costs 78.37 85.15 71.09 52.44 45.32  
Other income 46.40 2.00 6.52 9.44 3.21  
Exceptional items 9.54 – 
PBT 159.19 203.28 234.48 295.62 336.92  
Tax 12.92 10.09 30.22 57.68  
PAT (before Minority Interest and share of Associates) 146.27 193.19 234.48 265.41 279.24  
Profit/ (loss) attributable to Minority Interest (0.32) 0.23 0.16 0.44 – 
Consolidated Profit / (Loss) for the year 146.59 192.96 234.32 264.97 279.24  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 
Operating Profit Margin Ratio 9.92 11.66 12.55 12.53 12.32 
Net Profit Margin Ratio 5.19 6.22 7.73 8.22 7.85 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 430.78 657.67 659.74 666.29  673.32
Share application money pending allotment 0.07 0.02
Reserves & Surplus 999.11 1,055.96 1,431.69 1,422.33    1,751.77
Net worth (shareholders funds) 1,429.88 1,713.64 2,091.49 2,088.64    2,425.08
Minority Interest 1.33 1.14 1.44 1.63        1.97
Long term borrowings 925.88 850.06 664.15 414.30  426.97
Current liabilities 1,496.12 703.35 860.61 869.75  769.85
Other long term liabilities and provisions 67.26 55.20 40.06 17.75     16.13
Deferred Tax Liabilities 11.02 28.29 31.72 34.47     27.22
Total Liabilities 3,931.49 3,351.67 3,689.45 3,426.54    3,667.22

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 195.72 156.16 136.79 118.76  140.66
Noncurrent Investments 1.60 2.68 2.64 5.76        8.38
Current assets 1,262.98 654.45 748.12 743.61  788.45
Long term advances and other noncurrent assets 160.33 178.29 207.86 224.78  260.49
Deferred Tax Assets
Goodwill on consolidation (net) 2,310.86 2,360.10 2,594.04 2,333.64    2,469.24
Total assets 3,931.49 3,351.67 3,689.45 3,426.54    3,667.22

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 7.85 10.90 13.13 15.20 14.18
ROE / RONW 4.35 8.55 9.23 11.22 10.94

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 2,818.54 3,105.88 3,034.65 3,230.29  3,555.61 
Growth (%) 24.99 % 10.19 % (2.29 %) 6.45 %  10.07 % 
PAT (Rs. Cr.) 146.27 193.19 234.48 265.41  279.24  
Growth (%) 135.12 % 32.08 % 21.37 % 13.19 %  5.21 % 
Earning Per Share – Basic (Rs. ) 2.91 2.93 3.53 3.96  4.14
Earning Per Share – Diluted (Rs. ) 2.82 2.82 3.34 3.78  4.08 
Price to Earnings 3.62 10.18 8.82 8.82  9.39 

Dividend History

The Company has maintained an average dividend yield of 0 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Firstsource Solutions’s average current ratio over the last 5 financial years has been 1.23 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Firstsource Solutions’s average long term debt to equity ratio over the last 5 financial years has been 0.53 times which indicates that the Company is operating with a reasonable level of debt and may not find difficulty to meet its obligations.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Firstsource Solutions’s average interest coverage ratio over the last 5 financial years has been 4.98 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Firstsource Solutions reported a promoter holding of 54.89 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 16.44 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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