Firstsource Solutions Ltd. – A Hidden Gem

By | 28th February 2018

Firstsource Solutions Ltd.

A Hidden Multibagger
A Hidden Gem Stock


(BSE Code: 532809)      (CMP: Rs.51.75)      (FV: Rs.10)

Company Overview:

First Source is the leader in Business Process Management (BPM) sector, giving customer centric business process services. Firstsource Solutions Ltd. is a RP-Sanjiv Goenka Group company, a Rs.17400 crore conglomerate. All First Source group entities operates independently and the accounts are consolidated at the group level. The RP-Sanjiv Goenka Group owns close to 55% shares of First Source through a subsidiary. FSL provides its services in the Healthcare, Telecommunications & Media, and Banking, Financial Services & Insurance (BFSI) industries. The company works with Fortune 500, FTSE 100 companies in the US, the UK, Philippines, India and Sri Lanka. Over the last decade, the company has focused on creating world class processes, developed Intellectual Property (IP), adopted industry standard technologies for continuous improvement in the quality of services which results in precise delivery of solutions. On a consolidated basis, the company had 48 global operation centers. The centers are located across India, US, UK and Philippines. 20 of the Company’s operation centers are located in 13 cities in India, 18 in USA, 8 in UK and 2 in Philippines.

Capital, Reserve & Promoter’s shares:

The Company’s equity of Rs.685.26 crore is supported by reserves of around Rs.1346.70 crore. Its share book value stood at Rs.29.67 as at 31 March 2017. The promoters hold 54.57% Mutual Funds hold 1.25%, FPIs hold 5.93%, old promoter ICICI Bank hold 4.90%, Rakesh Jhunjhunwala holds 2.92% while the investing public holds 30.43% stake in the company.

Past Performance:

For Q3FY18, its PAT zoomed 42.69% to Rs.99.56 crore against Rs.69.77 crore in Q3FY17 on an income of Rs.863.14 crore fetching an EPS of Rs.1.46. For 9MFY18, its PAT stood at Rs.233.71 crore against Rs.214.34 crore in 9MFY17 on an income of Rs.2560.18 crore fetching an EPS of Rs.3.42.

Industry Outlook:

After a few years of stagnation, the global IT industry saw a modest growth recovery of about 4% in 2016. The worldwide IT spending is projected to be USD 3.5 trillion in 2017, which is 2.7% higher than the spend in 2016. New age technologies will be a key driver for the global IT-BPM industry, where the addressable market is likely to expand to ~USD 4 trillion by 2025 at a CAGR of 3.6%! It is expected that the industry’s mix between traditional and digital will change significantly over the next decade. The Indian IT-BPM industry has been affected by the global economic downturn as well as the political developments around the world. According to NASSCOM’s Strategic Review 2017, Indian IT services and BPM industry’s sectoral revenue is expected to reach USD 200-225 billion in 2020 and revenue of USD 350 billion by 2025. IT-BPM exports play a key role in India’s economy. Its share in India’s total service export is over 49% and accounts for 32% of India’s forex reserves.


Final Verdict:

The management has reiterated that FY18 sales growth would be in line with the industry on the back of a healthy deal pipeline and strong traction in Healthcare and Mortgage businesses in the US and BFSI in the UK. The size of the deals too has increased in this quarter. The management is confident of a margin expansion on a constant currency (CC) basis as the losses in the ISGN business have been arrested and profitable recovery seen in Q3FY18 given an uptick in the mortgage business, traction in the healthcare business and its exit from some unprofitable business. The management feels that the core business performance continues to do well. Seasonally, its Q4 is the strongest quarter and the reduction in US tax rates is a positive step for the Company. FSL’s net long-term debt stands at US$50.4 mn. Debt repayment continues as per plan and the management has guided for debt-free company by FY19. At CMP of Rs.51.75, FSL trades at P/E ratio of 11.87x earnings. Based on above financial and performance parameters, the FSL share looks quite attractive at the current level. Investors can accumulate this share with a stop loss of Rs.43 for an upper target of Rs.75 in next 12 to 15 months. The stock’s 52-week high/low is Rs.52.45/30.4 and its market cap stands at Rs.3549.26 crore.
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The stocks picks are based on my own research and personal views and sometimes are from newspapers, tv channel program, magazines, etc. No part of compensation is or will be directly or indirectly related to the views and recommendations of this research. I have not served as an officer director or employee of company and have not been engaged in market – making activity of the company covered in the research report.
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