Wednesday Telefolio Plus - Firstsource Solutions

First choice in BPO space
While organic growth prospects itself will be impressive, benefits of inorganic growth will be icing on the cake

Firstsource Solutions, formerly known as ICICI OneSource, is a leading provider of offshore business process outsourcing (BPO) services to clients primarily in the banking, financial services and insurance (BFSI) ( 51.8% of total revenues), telecommunications and media (33.9%), and healthcare industries (9.2%).
The third largest standalone Indian BPO vendor, Firstsource's key strengths are domain expertise (e.g. ICICI Bank parentage gives an edge in financial services), integrated offshore-onshore delivery and ability to complement organic growth through acquisitions/alliances, with a history of retaining acquired clients/people.
Excellent sequential performance
On the back of approximately 16% growth on organic business and balance on acquisition of BPM, Firstsource reported 28% sequential growth in consolidated operating revenues to Rs 274.70 crore. The operating margins improved by 30bps to 20.1% eventhough it was impacted by recruitment of 3672 employees in the quarter leading to 650bps increase in personnel costs partially compensated by higher operational efficiencies.
The resultant operating profits grew by 30% Rs 55.21 crore. Other Income for the quarter dipped 75% to Rs 2.09 crore. Depreciation charge increased by 28% to Rs 19.99 crore on account of amortization of issue expenses, the resultant PBT increased by 8% to Rs 35.68 crore. Tax for the quarter dipped by 74% to Rs 0.84 crore on account of year-end adjustments and transfer pricing issues. PAT grew by 16% to Rs 34.84 crore. The Net Profit after minority interest grew by 16% to Rs 34.92 crore.
Superb Y-o-Y performance
For the quarter ended March 31, 2007 , Firstsource reported 71% y-o-y growth in operating revenues to Rs 274.70 crore. The operating margins dipped by 260bps to 20.1% on the back of increase in personnel cost by 660bps as a % of operating revenues on account of higher headcount. The resultant operating profits surged by 51% to Rs 55.21 crore. Other Income for the quarter grew by 254% to Rs 2.09 crore on account of higher interest on deposits. The resultant PBIDT grew by 54% to Rs 57.30 crore.
Interest cost for the quarter dipped by 38% to Rs 1.63 crore, Depreciation for the quarter grew by 72% to Rs 19.99 crore on account of higher capex. The PBT improved by 56% to Rs 35.68 crore. Tax provision for the quarter decreased by 36% to Rs 84 lakh on the back of transfer pricing issues. The resultant PAT before minority interest grew by 61% to Rs 34.84 crore. Minority Interest for the quarter stood at Rs 1 crore. The net profit for the quarter after minority interest surged by 61% to Rs 34.92 crore.
Yearly performance sees 51% rise in revenues and 294% jump in PAT
For the year ended March 2007, Firstsource recorded 51% rise in consolidated revenues to Rs 829.76 crore on the back of 105% growth in Telecom & Media vertical and 132% growth in Healthcare. OPM improved by 520bps at 19.8%. Thus driven by robust revenue growth operating profits were up by 106% to Rs 164.38 crore. Other Income zoomed to Rs 10.17 crore. On the back of building and expansion of new facilities during the year, depreciation charge was higher by 42% to Rs 64.15 crore, the resultant PBT grew by 281% to Rs 102.63 crore. Provision for taxation was higher by 123% to Rs 96.62 crore, thus PAT was up by 298% to Rs 96.62 crore. Net profit after Minority interest grew by 294% to Rs 97.25 crore.
Operates in high growth industry
IDC estimates that, globally, BPO service revenues will grow at a 10.9% CAGR to FY09, which is faster than all other markets viz. IT services, software products and hardware. BPO involves transfer of in-house business functions to an external service provider. In India this is also referred to as IT enabled services, i.e. business processes that can be enabled by IT. Therefore, this includes outsourcing of processes such as payroll, finance and accounting ( e.g. receivables management), insurance claims administration, credit card processing and market research analysis.
The Indian offshore BPO market is growing faster than the global market, at a ~43% CAGR over FY04-FY06E. India has continued to increase its market share of offshore BPO from 39% in 2001 to 46% in 2005. As per a McKinsey report entitled, 'NASSCOM-McKinsey Report 2005 – Extending India's leadership of the Global IT and BPO industries', Indian BPO revenues are expected to grow at a 37% CAGR to FY10.
Impressive margin expansion; trend likely to continue
During March 2007, Firstsource registered 30 basis points improvement in OPM in spite of large addition of employees, which were yet to be fully utilised. For the FY 2007, its OPM expanded by a solid 520 basis points to 19.8%.
The company can be expected to continue to improve its margin expansion on improving mix (e.g. acquisition of BPM Inc. to grow health claim adjudication skills), better seat utilization, also helped by increase in transaction processing revenues and SG&A leverage.
Management foresees all round growth in FY 2008
Commenting on the performance, Ananda Mukerji, MD & CEO said, "It's been a year of all-round achievement. We continued to grow both revenues and profits. Considerable progress was made in expanding our global delivery footprint with new centers being set up in USA, UK and Argentina . We also deepened our capabilities in the healthcare vertical and entered the domestic market with a significant contract. And last but not the least was Firstsource's listing on the Indian stock exchanges and the beginning of our relationship with global and Indian investors. We see a continued strong demand with clients looking for financially strong vendors with a sustained track record of delivery.''
Rajesh Subramaniam, CFO said, "Growth in profits and margin expansion this financial year has been on the back of high revenue growth benefits from economies of scale and operational efficiency. Going forward we see growth coming from strong demand in all our three verticals. In the BFSI sector for both collections and the joint Metavante-Firstsource service proposition, as also from healthcare services and the telecom business."
Aggressively expanding globular delivery centers
As of March 31, 2007 Firstsource had 24 centers with operations across India, US, UK & Argentina. During the year, Firstsource added 13 delivery centers; 8 overseas and 5 in India. The overseas centers are in Northern Ireland , Buenos Aires , Argentina and in the US. Firstsource's 5 centers in India are in Kolkata, Chennai, Vijaywada, Trichy & Kochi.
Firstsource's Philippines centre is expected to commence operations in Q1 fiscal 2008. This centre will initially have 150 seats
Newly struck alliances and strategic acquisition to benefit going forward
In April 2006 Firstsource entered into a strategic partnership with Metavante Corp. Metavante holds 20.18% stake in the company as of March 31, 2007. Metavante is the third largest provider of technology products and services to the financial services industry in the United States.
Firstsource is Metavante's exclusive offshore and preferred onshore BPO partner and has access to Metavante's banking domain consultants and preferred rights to the use of its widely-accepted technology platforms for providing outsourcing services to Metavante's over 1,000 clients which include, along with 91 of top 100 US banks, superregional, regional and local banks and financial institutions.
In January 2007 Firstsource acquired BPM Inc., a Delaware-based healthcare claims outsourcing company in the United States. The acquisition helped Firstsource deepen its proposition in the Healthcare vertical with enhanced capabilities in complex claims adjudication
Entering fast growing Domestic BPO market in a big way
Firstsource is entering the fast growing domestic market in a big way. It set up four new centers in Vijaywada, Kochi, Hubli & Trichy to provide BPO services to Hutch, a leading provider of telecom services in India. Its centers will have approx 2,000 seats. Firstsource views the domestic market as a very large opportunity where high quality BPO companies with international experience can bring significant value. NASSCOM-IDC estimates the domestic ITES-BPO market to be in the region of Rs 6608 crore with BFSI-Telecom verticals accounting for over 70% of the demand
Impressive client and employee addition
Firstsource added 22 clients in FY 2006-07.
Total number of clients as of March 31, 2007: 76 including 3 of the 5 largest US banks, 5 of 10 largest credit card companies in the US, 2 of the world's Top 10 telecom companies and 3 "Fortune 100" healthcare companies.
Top 5 clients contributed 51.4% of revenue in FY07 and 5 clients had revenues over Rs 50 crore.
Revenues from existing clients contributed nearly 94.2% to revenues
The company added 6,046 employees added for the full year with 3,679 added in the last quarter. It has 14,396 employees as on March 31, 2007. It has 2,182 employees in overseas.
Reasonable valuation
In FY 2008, we expect the company to register sales and net profit of Rs 1247.96 crore and Rs 178.27 crore without considering any inorganic growth. On fully diluted equity of Rs 461.00 crore and face value of Rs 10 per share, EPS works out to Rs 3.9. The share price trades at Rs 82. P/E works out to 21.2.