Firstsource Solutions, formerly known as ICICI OneSource, is promoted by ICICI Bank, a leading provider of offshore business process outsourcing (BPO) services to clients primarily in the banking, financial services and insurance (BFSI) (53.3%), telecommunications and media (34.4%), and healthcare (6.1%) industries.
Based on the annual rankings by Nasscom, Firstsource has the fifth largest revenue among BPO provider in India in FY2006. The company had 20 delivery centres with 11 located in seven cities in India, six in the US, two in the UK and one in Argentina end December 2006. It had 10,717 employees and 74 clients including BskyB, Capital One, CompuCredit, ICICI Bank, ICICI Prudential, Lloyds TSB Plc., Uniprise, Vodafone, WAMU, HSBC and Wachovia.
Firstsource entered into a strategic partnership with Metavante, the third largest provider of products and services to the financial services industry in the US, in March 2006. Metavante currently has a 20.60% (post-issue) shareholding in the company, which, in turn, is Metavante’s exclusive offshore and preferred onshore BPO service partner.
Firstsource made its sixth acquisition end December 2006 by acquiring 100% of BPM (Business Process Management) and its subsidiaries, BPO companies serving the US healthcare industry, for US$ 35 million including earn-out consideration of US$ 2.45 million if BPM’s 2007 EBITDA equals or exceeds a minimum EBITDA of US$ 4.5 million. If EBITDA exceeds US$ 4.5 million, US$ 2.10 will be added to the base amount of US$ 2.45 million, up to the total possible earn-out consideration of US$ 3.5 million.
The current issue of 6.93 crore shares includes offer for sale of 93 lakh shares by ICICI Bank, the promoter. Of the net proceeds of the issue, Rs 180 crore is earmarked for acquisitions, Rs 46.29 crore to set up of new facilities, and Rs 45 crore to repay loan.
Strengths
- Firstsource is the third largest revenue earner among pure-play BPO providers in India in FY 2006. Nasscom has ranked it as the fifth largest revenue generator among all BPO providers. The company has a wide presence with 20 delivery centres in India, the US, the UK and Argentina. It has worked with 74 clients, with repeat business accounting for 87.1% of the revenue in FY2006. Three clients contributed more than Rs 50 crore.
- The Nasscom-McKinsey Report estimates the global offshore BPO industry to grow at a CAGR of 37%, from US$ 11.4 billion in 2005 to US$ 55 billion by 2010. India-based companies accounted for 46% of the total offshore BPO revenue in 2005. The report projects the Indian offshore BPO market to grow from US$ 5.2 billion in 2005 to US$ 25 billion by 2010 --- a CAGR of 36.9%.
Weaknesses
- The post-issue equity base of Rs 416.26 core will be the highest in the IT industry. It is also disproportionately large compared with its size (in terms of sales/profits).
- BPO industry-specific risks such as rising wage cost, high attrition levels, increasing sensitivity to US economic slowdown and anti-offshore rhetoric in western countries, advancing degree of M&A and related risks, and dangers of litigation and claims from clients, compared with the software industry.
Valuation
Between FY 2003 to FY 2006, consolidated revenue registered a CAGR of 94.5% and net profit grew from loss of Rs 10.95 crore in FY 2003 to profit of Rs 24.67 crore in FY 2006. The nine-month annualised EPS on post-equity works out to Rs 2. At the price band of Rs 54 – Rs 64, PE is 27 – 32.1. The TTM PE of Computer – Software Medium/Small is 26.6. However, in the BPO space, WNS trades at a TTM PE of 58.4 and EXL Services Holdings trades at TTM PE of 48.4 on the New York Stock Exchange. On the basis market capitalisation to sales, WNS trades at 6.1 (end March 2006) and EXL Services Holdings 8.9 (end December 2005) against Firstsource’s 4.1 – 4.9.