Firstsource Solutions Ltd
Information Technology - Software & Services
Soften Operating Performance Due to Macro Uncertainties
Flat revenue growth; Margins drop by 101 bps QoQ: FSL recorded revenue of Rs. 8923 Mn in Q4FY17 with an increase of 0.8% QoQ, EBITDA in Q4FY17 is lower by 7.6% QoQ at Rs.990 Mn which was at Rs. 1072 Mn in Q3FY17 and the margins dropped to 11.1% which is down by 101 bps QoQ and 222 bps YoY. In FY17, the company recorded revenue of Rs. 35556 Mn which is up by 10.1% YoY. PAT stood at Rs. 2792 Mn for FY17 which is up by 5.2% YoY compared with FY16.
Macro environment headwinds impact operating margins: The company has witnessed many challenges over the year FY17 starting with Brexit which was unexpected and thus has an impact on depreciation of British Pound which took significant hit on net profit due to forex losses of Rs. 350 Mn. US interest rates and resultant bond yields impact mortgage market in US. The business potential of ISGN highly affected by the US current interest rate. The revenues at ISGN declined to US$ ~8 Mn for Q4FY17 compare with US$ ~11 Mn revenues in Q3FY17 thereby leading to operational losses of US$ 1.65 Mn in Q4FY17. As expected, Sky transition has been completed as per plan. Over 1,000 employees have been added by Mar 2017. The incremental revenue of US$ ~12 Mn was added in FY17. Along with management expecting decent revenue growth, visibility in FY18E driven by SKY deal with an incremental revenue of ~US$ 32 mn in FY18E implying more than ~6% YoY growth visibility for FY18E.
Management expecting that Q1FY18E to be subdued and largely similar to Q4FY17, also the mortgage-refinance market to be somewhat sluggish, thereby impacting margins. Overall FY18E revenue growth would be in line with the industry growth rate of ~6-8%.
Valuation and Outlook
Despite uncertainties around US mortgage business and payer business, recently concluded SKY deal supports growth visibility for FY18E-19E. We continue to maintain our positive outlook on FSL and we maintain our “BUY” rating with a revised target price of Rs. 44.
Information Technology - Software & Services
Soften Operating Performance Due to Macro Uncertainties
Flat revenue growth; Margins drop by 101 bps QoQ: FSL recorded revenue of Rs. 8923 Mn in Q4FY17 with an increase of 0.8% QoQ, EBITDA in Q4FY17 is lower by 7.6% QoQ at Rs.990 Mn which was at Rs. 1072 Mn in Q3FY17 and the margins dropped to 11.1% which is down by 101 bps QoQ and 222 bps YoY. In FY17, the company recorded revenue of Rs. 35556 Mn which is up by 10.1% YoY. PAT stood at Rs. 2792 Mn for FY17 which is up by 5.2% YoY compared with FY16.
Macro environment headwinds impact operating margins: The company has witnessed many challenges over the year FY17 starting with Brexit which was unexpected and thus has an impact on depreciation of British Pound which took significant hit on net profit due to forex losses of Rs. 350 Mn. US interest rates and resultant bond yields impact mortgage market in US. The business potential of ISGN highly affected by the US current interest rate. The revenues at ISGN declined to US$ ~8 Mn for Q4FY17 compare with US$ ~11 Mn revenues in Q3FY17 thereby leading to operational losses of US$ 1.65 Mn in Q4FY17. As expected, Sky transition has been completed as per plan. Over 1,000 employees have been added by Mar 2017. The incremental revenue of US$ ~12 Mn was added in FY17. Along with management expecting decent revenue growth, visibility in FY18E driven by SKY deal with an incremental revenue of ~US$ 32 mn in FY18E implying more than ~6% YoY growth visibility for FY18E.
Management expecting that Q1FY18E to be subdued and largely similar to Q4FY17, also the mortgage-refinance market to be somewhat sluggish, thereby impacting margins. Overall FY18E revenue growth would be in line with the industry growth rate of ~6-8%.
Valuation and Outlook
Despite uncertainties around US mortgage business and payer business, recently concluded SKY deal supports growth visibility for FY18E-19E. We continue to maintain our positive outlook on FSL and we maintain our “BUY” rating with a revised target price of Rs. 44.
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