First Solution EQUITY RESEARCH REPORT

Initiating Coverage
March 18, 2010
Rating Matrix
Rating Target Target Period Potential Upside : : : : Strong Buy Rs 38 12 months 31%
Firstsource Solutions Limited (FIRSOU)

Rs 29.0
IT is enabled (ITeS) to ride the recovery

FY12E 15.3 23.4 29.1 29.1
YoY Growth (%)

FY09 FY10E FY11E Net Sales 34.7 11.6 6.8 EBITDA -1.1 20.2 13.0 Net Profit -17.3 22.3 18.2 EPS -17.3 22.4 17.5 *FY09 Net profit without MTM loss for FCCB
Stock Metrics
Bloomberg/Reuters Code Sensex Average volumes Market Cap (Rs crore) 52 week H/L Equity Capital (Rs crore) Promoter's Stake (%) FII Holding (%) DII Holding (%) FSOL.IN/FISO.BO 17383 1,646,000 1,238 40.0 / 10.9 429.1 21.4 7.2 5.0
Firstsource Solution Ltd, a pure BPO player, has a hybrid offshoreonshore presence and is set to tap the increasing spend on business services by the healthcare and telecom industries. With the Indian BPO industry expected to grow at 12.5% CAGR over FY09-FY12E, the company, that has always outperformed industry growth, is slated to grow at 13% CAGR (in constant currency) and 11% CAGR (in rupee terms). We are initiating coverage on Firstsource Solution Limited with a STRONG BUY rating and a target price of Rs 38.
Focus on healthcare, telecom & media (T&M) to catapult growth
The company has a strong foothold in the end-to-end business services offerings for healthcare provider and payer segment (38% of revenue) as well as the T&M industry (38% of revenue). These verticals are expected to grow at 9% CAGR and 21% CAGR, respectively, over FY09-FY12E. In addition, the Asia business unit (ABU), which again has T&M as prime focus, is outlined to grow at 17% CAGR. Together, these verticals will propel the companys revenue to growth of 11% CAGR over FY09-FY12E.
Price movement (Stock vs. Nifty)

60 40 20 0 Apr-09 Sep-09 Jul-09 Oct-09 Dec-09 Mar-09 Jan-10 Jun-09 Mar-10 6000 4500 3000 1500 0
Profitability to head northwards

The companys move to turn ABU EBIT neutral by H2FY11, expected pent up volumes for healthcare as well as T&M industries in the UK, US and a burgeoning domestic telecom market will help to improve seat fill factors & scale down SGA, aiding margins. We expect EBIT and PAT to grow at a scorching pace of 27% and 21% CAGR, respectively, over FY09-FY12E.
FCCB: No longer a risk due to strong profitability
We believe the companys US$212 million outstanding FCCB, which is due in Dec 12 is like debt as the conversion price of Rs 92 will be easily repaid on the back of strong internal accruals (I-direct estimate: US$120 million) with improving profitability and viable refinancing option for the rest with debt to EBITDA of 2.7x FY11 EBITDA.
FIRSOU(L.H.S)
Peer comparison
Return % Firstsource Hinduja Global Eclerx Cambridge soln 1M -5.3 -0.5 13.0 -13.5 3M -15.6 -4.5 26.9 (23.2)
NIFTY(R.H.S)
Valuations
At the CMP of Rs 29, the stock is trading at 7.5x FY12E EPS. We value the stock at Rs 38 per share, which we have arrived at on a combination of relative valuation methods with companies like WNS, Genpact and EXL as benchmark. This conforms to our DCF-based target price of Rs 38. Hence, we are initiating coverage on the stock with a STRONG BUY rating.
Exhibit 1: Valuation matrix
(Year-end March) Net Sales (Rs crore) EBITDA (Rs crore) Net Profit (Rs crore)* EPS (Rs) P/E (x) Price / Book (x) EV/EBITDA (x) RoE (%) RoCE (%) FY08 1,298.7 233.9 131.5 3.1 9.4 1.7 10.5 18.0 7.4 FY09* 1,749.7 231.4 108.8 2.5 11.4 0.9 10.6 2.2 5.0 FY10E 1,953.0 278.3 133.0 3.1 9.3 0.8 8.8 8.8 6.5 FY11E 2,085.4 314.4 157.3 3.7 7.9 0.7 7.8 9.4 7.1 (Rs Crore) FY12E 2,405.4 388.0 190.8 4.4 6.5 0.7 6.3 10.3 10.3
6M -18.1 -11.9 47.4 (2.7)
12M 147.3 332.0 344.9 6.9
Target Multiple
Target PE EV/EBITDA Price/BV FY09 14.9 10.6 0.9 FY10E 12.2 8.8 0.8 FY11E 10.4 7.8 0.8 FY12E 8.0 6.3 0.7
Analysts name
Srishti Anand srishti.anand@icicisecurities.com
Source: Company, ICICIdirect.com Research * refers to FY09 net profit number which excludes MTM loss on FCCB
ICICIdirect.com | Equity Research
Firstsource Solution Limited (FIRSOU)
Company Background
Shareholding pattern (Q3FY10)
Shareholders Promoters Others Insitution % holding 21.4 66.4 12.18
Firstsource Solution Ltd was founded by ICICI Ltd in December 2001. The company is among the top three pure play BPO companies in India as per Nasscom 2009 rankings. It offers a full range of business process management services across the customer life cycle from customer acquisition, customer care, transaction processing, billing & collections and business research & analytics. It has 33 global 2000 companies as clients including 17 Fortune 500 and eight FTSE 100 companies. Key industries it caters to are healthcare, t7m and BFSI (Exhibit 2). It has a multi-shore delivery model with 27,308 employees spread across five countries: India, US, UK, Argentina and Philippines with 43 delivery locations.
Exhibit 2: Revenue mix by geography (%)
The company derives a majority of its revenues from the US i.e. 60% primarily for its healthcare and BFSI business. The proportion of the US increased in FY08 with the acquisition of MedAssist. The UK contributes about 27% to its revenues with clients largely in the telecom & media business and BFSI
US(including canada) UK India Rest of world

Source: Company, ICICIdirect.com Research
FY07 47.3 48.7 3.8 0.2
FY08 54.0 35.0 10.8 0.1
FY09 63.0 26.0 10.8 0.3
9MFY10 60.2 27.0 12.1 0.6
Almost 80% of the employee are located offshore i.e. India, Philippines and Argentina. In fact, 50% of the total employee base is in the Asia business unit while 30% of the employees are located in offshore centres to deliver services for US healthcare, global telecommunication & media and BFSI industry clients.
The company has almost 80% of its employees deployed in offshore locations i.e. India, Philippines and Argentina while the rest are onshore (US and UK). In the UK, the majority of people are based out of Ireland Exhibit 3: Employee split by vertical and delivery centres Onshore Offshore US UK India Phillipines Argentina Healthcare 2200 845 Telecommunication & Media 1782 4472 312 88 Asia business unit 13575 BFSI 1258 2052 200 Total Technical employees 3458 1782 20944 512 88 Sales & Support 0 0 433 91 0 Total employees 3458 1782 21377 603 88
Total 3045 6654 13575 3510 26784 524 27308
The onshore delivery centres are the major contributors to revenue because effort from the healthcare vertical is 80% onshore whereas offshore delivery centres contributes only 29% to billing. The 13,575 employees working for domestic T&M as well as BFSI clients are billed under the domestic business. The company started focusing on the domestic business in FY08 to tap opportunities related to the Indian telecom industry Overall, healthcare and telecom & media are the dominant contributors with 76% contribution to revenues (this includes Indian T&M clients also). The companys healthcare vertical contribution was scaled up by the acquisition of MedAssist in August 2007 (Q2FY08)
Exhibit 4: Revenue mix by delivery (%)
Offshore Domestic Onshore

FY07 64.9 3.8 31.3
FY08 39.6 10.8 49.6
FY09 30.5 10.8 58.8
9MFY10 29.0 12.1 58.8
Exhibit 5: Revenue mix(Industry wise )
BFSI Telecom & Media Healthcare others

FY07 51.8 34 9.1 5.1
FY08 30.8 36.0 29.8 3.4
FY09 25.2 32.4 39.9 2.5
9MFY10 22.6 37.6 38.0 1.9
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The key industries it caters to are healthcare, telecom & media and BFSI (Exhibit 5). Following are the key facts in each of the following industry:Exhibit 6: Key facts segment wise Healthcare US Key Market Key Segments Healthcare Payer
& Healthcare Provider 3045 3414 73% US$50-55 billion US and India
Employee Strength Seats Seat fill factor Addressable market opportunity(2020) Delivery centers
T&M US, UK and Australia Wireless & Mobile, Cable & Satellite TV, Broadband and Fixed line 6654 4140 82% US$20-25 billion UK, India, Philippines & Argentina.
BFSI US and UK
ABU India
Credit cards, Telecom & Media Retail Banking, Mortgages and General Insurance and BFSI 3510 13575 3109 8174 85% 79% US$155-165 US$60-65 billion billion US, India and Philippines India
MedAssist acquisition: A Synergistic move

The company scaled up its healthcare vertical via the acquisition of MedAssist in August 2007 (i.e. Q2FY08) for 3.3x CY06 sales i.e. US$333 million. MedAssist was a pan-American leading provider in revenue cycle management and had service offerings to address the entire revenue cycle for healthcare providers. This acquisition brought in 1,000 clients, which included 800 hospitals with the largest client contributing 4.3% and top 10 clients contributing 28.7% of total revenues. It served 800 out of 5,000 hospitals in the US and already has a substantial market share. The most important aspect was that billing was 100% outcome based with an impressive EBITDA margin of 22-24% at that time. This acquisition gave the company a strong foothold in the North American market with over 1,400 employees all based out of 23 delivery centres in the US. Post the acquisition also, the healthcare vertical demonstrated strong revenue growth of 89% YoY in FY09 and managed to maintain positive growth of 8% YoY in YTDFY10.
Metavante: A strategic but inactive partnership
Firstsource entered into a strategic partnership in August 2006 with Metavante, which provides financial solutions, payment solutions and consulting & professional services. Metavante has a 20% stake in Firstsource. This partnership entitles the company to have access to Metavantes 1000+ clients. This channel, which was expected to help Firstsource break into many mid-size banks in the US, has not really yielded much for the company. Hence, the BFSI vertical, which is a major spender on BPO services globally, has failed to prove to be a growth driver for the company and has been a laggard over the past two years.
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Investment Rationale
Indian BPO services industry: Growth momentum to continue
The worldwide BPO spend, which was pegged at US$131 billion (in CY09) has grown at 13% CAGR over CY07-CY09 i.e. at 0.5x the rate at which the Indian BPO industry has grown over the same period. According to Nasscom SR2009, the worldwide BPO spend should grow at 11% CAGR over CY09-CY12 reaching US$181 billion by the end of CY12.
The worldwide BPO spend has grown at 13% CAGR over the past two years i.e. CY07-CY09. As per Nasscom SR 2009, worldwide BPO spend is expected to run up at 11% CAGR over CY09-CY12E to reach US$181 billion
Exhibit 7: Trend in worldwide BPO spend

200 180 160 140 USD billion 120 100 80 60 40 20 0 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 103 131 115 CY09-CY12 CAGR:11% CY07-CY09 CAGR:13% 146 181 164
Worldwide BPO spend

Source: Nasscom, ICICIdirect.com Research
The Indian BPO industry, which is US$14.7 billion in size (as per Nasscom Strategic Review 2009 report) has grown at the rate of 34% CAGR over the past five years, i.e. FY04-FY09 (Exhibit 8).
The Indian BPO industry has burgeoned at 34% CAGR over the past five years i.e. FY04-FY09 and almost quadrupled to US$14.7 billion from US$3.4 billion
Exhibit 8: Indian BPO industry trend
15
FY04-FY09 CAGR:34% 53 12.5 9.5 32 32
14.7
60 50 40 30 18 20 10 %
USD billion
10 7.2 5.2 5 3.4
38
0 FY04 FY05 FY06 FY07 FY08 YoY FY09
Total Indian BPO

Source: Nasscom, ICICIdirect.com Research
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Exports have been the major contributor with 87% contribution. It has grown at 33% CAGR over the same period with the rest coming in from domestic spend, which has grown at 45% CAGR over FY04-FY09. The Indian IT-BPO industry has increased its share from 12% in CY07 to 13% in CY08, when the worldwide BPO spend grew by 11.7% YoY. Post the onset of the financial crisis, there was an increasing trend for outsourcing. This is evident from the fact that 2008 as well as 2009 saw a lot of merger and acquisition in the BPO space as large multinational corporations made a move to hive off their captive BPO and sell them off as these noncore activities proved to show cost run-ups. At the same time, the cost advantage of offshoring came into the limelight with companies asking vendors to offshore more of their business process. Thus, in the backdrop of the economic slowdown, even if we assume that Indian IT BPO will just be able to maintain a share of 13% if not increase it, the Indian BPO industry can be expected to grow at 12.5% CAGR over FY09-FY13E to reach US$23.5 billion by FY13E (Exhibit 9).
The Indian BPO industry has grown at 24% CAGR over the past two years i.e. FY07-FY09. Over the same period, it has improved its market share to 13% of the worldwide BPO spend. With the expectation that market share will be maintained over the next four years, we expect the Indian BPO industry to grow at 12.5% CAGR over FY09-FY13E
Exhibit 9: Trend in Indian BPO industry growth

25 20 USD billion 15 10 5 0 FY07 FY08 FY09 FY10E FY11E FY12E FY13E 9.5 FY07-FY09 CAGR:24% 14.7 12.5 FY09-FY13 CAGR:12.5% 21.4 19.0 17.0 23.5
Indian BPO industry

The company had always outperformed the Indian BPO industry growth (with as well as without MedAssist) in FY07 and FY08. In FY09, the company grew at almost the same rate as the industry because of demand erosion in T&M and BFSI in the UK and US as well as decline in volumes in healthcare with peaking unemployment in the US
Exhibit 10: Trend in YoY revenue growth for Firstsource and the Indian BPO industry
60 50 40 (%) 30 20 10 0
52 36 22
56
34 29 16 18
35
40 34 34
FY07 Firstsource
FY08 Total BPO Exports Total Domestic spend
FY09 Total BPO
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Firstsource Solutions has always grown at a more rapid pace as opposed to revenue growth shown by Indian BPO exports and domestic spend (Exhibit 10). Thus, even if the Indian BPO industry grows at the abovementioned rate, Firstsource can easily grow at our estimate of 13% CAGR (in constant currency) and 11% CAGR (in rupee terms) over FY09FY12E (Exhibit 11). Thus, the continued growth momentum of the Indian BPO industry on the back of the increasing trend of outsourcing business services will also help companies like Firstsource to scale up further.
The company has grown at 45% CAGR over FY07FY09. We expect it to grow at 13% CAGR (CC) and 11% CAGR (rupee terms) over FY09-FY12E
Exhibit 11: Trend in Firstsources revenue growth
3000.0 2500.0 2000.0 Rs crore 1500.0 1000.0 500.0 0.0 FY07 FY08 FY09 Revenues
60 50 40 30 20 10 0 FY10E FY11E FY12E %
YoY GROWTH
Focus on niche verticals like healthcare and telecom to drive growth

Firstsource Solutions exports (YTDFY10) include 39% of its revenues from the healthcare vertical, 25.7% from T&M, followed by BFSI at 22.3%. The balance 11.7% comes from ABU, which primarily caters to the domestic T&M and BFSI clients to a certain extent.
The healthcare vertical is the major contributor to revenues at 39%, followed by global T&M at 26%, global BFSI at 22% with the balance as Asia Business Unit for services to domestic T&M as well as BFSI clients
Exhibit 12: Revenue mix by segments (YTDFY10)
11.7 22.3
38.7 25.7
BFSI
Telecom & Media
Healthcare
Asia Business Unit
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US healthcare industry: A mammoth opportunity for business services

According to January 2009 estimates, technology research firm IDC expects US BPO services in healthcare to reach $5.3 billion in CY12, at a CAGR of 14.6% from CY07 levels. Spending on BPO services in CY09 is estimated to be at $3.5 billion. The company derives almost 38.7% of its revenues from the US healthcare industry by providing business services to two segments healthcare providers and healthcare payers. In fact, 70% of its contribution comes in from the US healthcare provider segment i.e. from hospitals and physician groups for patient services, eligibility services, receivables management and collections services. Health insurance costs are rising faster than wages or inflation. Also, medical causes were cited by about half of bankruptcy filers in the US in 2001. A recently released report on the latest figures showed that the US spent $2.5 trillion, $8,047 per person, on healthcare in 2009. This amount represented 17.3% of the economy, up from 16.2% in 2008, whereas the average is around 9% of GDP globally.
Of each dollar spent on healthcare in the US, 31% goes to hospital care, 21% to physician services, 10% to pharmaceuticals, 8% to nursing homes, 7% to administrative costs and 23% to all other categories (diagnostic laboratory services, pharmacies, medical device manufacturers, etc.) Thus, the 7% administrative spend that can be outsourced to Indian BPO players presents a mammoth opportunity for Firstsource
Exhibit 13: Break-up of healthcare spend in US (%)
23 31
8 10 Hospital care Nursing Homes Physician Services Administrative cost 21 Pharmaceuticals Others
Source: Congressional Budget Office (CBO), ICICIdirect.com Research
Exhibit 14: Healthcare insurance status (Under 65 yrs of age :80% of US population)
16
Almost 59% of the US population is insured by employers. As the unemployment rates go down this share will increase further translating into higher volumes for the company for its healthcare payer business
3 6 3 59 13
Employer sponsored health insurance Medicare Military Health care
Medicaid Non-group health Insurance Not insured
Source: Council of Economic Advisors(CEA), ICICIdirect.com Research
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Government programmes as major volume booster for business services in healthcare provider segment: Government programmes directly cover 27.8% of the total population (83 million), including the elderly, disabled, children, veterans and some of the poor. Federal law mandates public access to emergency services regardless of the ability to pay. Public spending accounts for between 45% and 56.1% of the US healthcare spending. Healthcare costs are the single most important factor influencing the federal governments budget trajectory. The reason for rising healthcare costs having major implications for government budgets is simple: almost half of healthcare is paid for by federal, state and local governments through Medicare (1), Medicaid (2), CHIP and other programmes. This fraction is expected to grow in the years ahead as the baby boom generation becomes eligible for Medicare and as enrolment in Medicaid and CHIP increases with rising jobless claims. In the absence of reform, Medicare and Medicaid expenditures are projected to rise from the current 6% of GDP to 15% in 2040. Only about one-quarter of this rise is due to the projected demographic shift in the population. The remaining three-quarter is due to the fact that healthcare costs are projected to increase faster than GDP. According to the Congressional Budget Offices (CBO) projections, without any changes in federal law, total spending on healthcare will rise from 17% of the economy in 2009 to 25% in 2025 and almost 50% in 2082. Indian BPOs see cash cow in Obama's health plan With close to 60 million more Americans set to come under public health insurance, if President Obama's proposed Bill is approved it will throw up incremental opportunities for Indian BPO players in the healthcare space. Companies are going to be forced to provide healthcare at even lower costs through lower premiums. This is only going to increase their cost pressures. This will, in turn, spur automation, outsourcing and offshoring to low cost locations. The US government is incentivising companies to automate their health records and penalising companies that do not comply. This whole electronic record business is like a Y2K opportunity. The need to integrate all records, payers, providers and others and bring them on to a unified system so that the government knows what the issues are presents a huge opportunity. Thus, the abovementioned expected ramp up in healthcare spending outlines strong volumes for companies like Firstsource in the long run. The companys focus on healthcare will act as a strong revenue as well as profitability driver as this segment enjoys highest revenue per employee (Exhibit 15), attractive margins of +50% in spite of high onshore effort of 72% (Exhibit 17). This presents headroom to shift work offshore and achieve further higher margins.
The healthcare vertical enjoys highest billing at $27 per hour per person, almost twice that of BFSI and thrice that of T&M. The revenue per employee in case of domestic business is a tad lower at $2 per hour. The prime reason for billings being very high in healthcare is because it is 100% outcome based. Also, in the BFSI vertical it bills the client as a percentage of debt collected. Thus, close to 60% of its business is output based resulting in higher revenue per employee in healthcare and BFSI
Exhibit 15: Revenue per employee Revenue per employee($ per hr) Q1FY10 Q2FY10 Q3FY10 Healthcare 31.8 27.6 27.1 Telecommunication & Media 9.4 9.6 9.1 BFSI 15.2 14.6 14.0 Asia business unit 2.2 2.0 2.0
Note: (1) and (2) refer to annexure
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Exhibit 16: Effort mix(Vertical wise)

The healthcare vertical has almost 72% effort onshore entirely from US, followed by BFSI with 36% effort onshore again entirely from the US. In case of T&M, the onshore effort is 27% with employees based entirely out of UK
100 75 50 25 Healthcare Telecommunication & Media Asia business unit BFSI
BFSI Asia business unit
FY12E
100 72 73 64 36
28
27
Onshore
Offshore
The healthcare segment enjoys the highest operating margin at 50% followed by BFSI at 45% with T&M at 30% whereas ABU is still EBIT negative at around -5%
Exhibit 17: Margin profile (industry wise)

60 50 40 30 % 20 10 (10) Healthcare Telecommunication & Media
US healthcare spending is expected to grow at 6.7% CAGR over CY07-CY17. The healthcare vertical for the company is expected to grow at 9% CAGR over FY09-FY12E
Exhibit 18: Trend in annual revenue growth for healthcare vertical for the company
1000 800 Rs crore 600 400 200 0 FY09
FY09-FY12E CAGR:9%
FY10E Healthcare
FY11E
Thus, on the back of ever increasing US healthcare spending, which is outlined to grow at 6.7% CAGR over CY07-CY17, the business services
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opportunity will indeed grow at a more rapid pace translating into incremental work for companies like Firstsource. Hence, we expect the healthcare vertical for the company to easily grow at 8.9% CAGR over FY09-FY12E, which we believe is still conservative.
Telecom & media to catapult revenue growth

According to the Nasscom-Perspective 2020 study, the addressable opportunity for telecommunications for Indian BPO service providers is estimated to be US$20-25 billion. Technology has radically transformed this industry and telecom service providers in advanced markets are in the process of upgrading their networks to data intensive 3G wireless networks. This will facilitate the provision of complex data services. Each of the sub-segments under telecom & media (refer Annexure) presents an opportunity for the company to leverage its end-to-end service offering of sales & marketing, account setup & activation, customer service, billing/help desk support, receivables & collection managements, etc. We expect this segment to grow at 21.0% CAGR over FY09-FY12E bolstering overall revenue growth for the company.
The companys T&M vertical is expected to grow at 21% CAGR over FY09-FY12E, on the back of a foreseeable opportunity in wireless, broadband, wire line and Pay TV segment
Exhibit 19: Trend in annual revenue growth for telecom & media for the company
800 700 600 Rs crore 500 400 300 200 100 0 FY09
FY09-FY12E CAGR:21%
FY10E
FY11E
FY12E
Telecommunication & Media

Asia business Unit: A revenue driver

The Asia business unit, which is the domestic business, contributes about 12% to the companys revenue. Almost 90% of its business comes from the telecom & media vertical whereas the balance comes from the BFSI vertical. Thus, the growth prospect for this vertical is highly dependent on the Indian telecom & media story. As highlighted below, the Indian market is still under penetrated with overall wireless tele-density of merely 46% (Q3FY10-Exhibit 41). Though the metropolitan cities that contribute merely 6% of the total population are over penetrated the Tier II, Tier III cities and rural India i.e. B circle and C circle that constitutes 17% and 44% of the population, respectively, are still under penetrated and present a huge opportunity for Indian telecom players (Exhibit 39, 40 and 41). Thus, on the back of the Indian telecom industrys subscribers expected to grow at 28% CAGR over FY09-FY12E (Exhibit 40), we expect the companys Asia business unit to easily grow at 16.9% CAGR over FY09-FY12E.
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On the back of strong subscriber growth expected in the domestic market of over 28% CAGR over FY09FY12E, we expect the Asia business unit to easily grow at 17% CAGR over FY09-FY12E
Exhibit 20: Trend in annual revenue growth for Asia business unit for the company
350 300 250 Rs crore 200 150 100 50 0 FY09
FY09-FY12E CAGR:17%
FY10E Asia business unit
FY11E
FY12E
Thus, we expect the company to register 11% CAGR over FY09-FY12E on the back of strong revenue growth of 9%, 21% and 17% CAGR by its main verticals like healthcare, telecom & media and ABU, respectively.
Margin to head northwards

As outlined above, telecom and media, ABU and healthcare will be revenue growth drivers for the company. Also, we expect the margin to march northwards on the back of the following facts: ABU will become EBIT neutral by H2FY11, scale up to 4% by FY12E as opposed to -3% range in FY11E and will accrue to profitability, As the volumes improve in T&M with the launch of new advanced technologies and new service offerings as well as in healthcare payer business with the unemployment rate abating and BFSI collection business returning to growth, SGA expenses will scale down, Also, the seat fill factor will further improve with improving business volumes helping to scale down other operating expenses. Apart from this, facilities consolidation like movement of process to low cost Philippines from Argentina and expansion in Tier II and III cities will provide cushion to margins.
Exhibit 21: Trend in seat fill factor
25000 82 80 78 76 74 72 70 68 66 64 FY07 FY08 FY09 Seats Q1FY10 Q2FY10 Q3FY10
With an improving business environment, the seat fill factor for the company has also scaled up from 70% (FY09) to 80% (Q3FY10). This is expected to improve further to provide cushion to margins on the back of lower operating expense with increased utilisation
20000 15000 10000 5000 0
Nos
Seat fill factor
Thus, we expect the EBITDA as well as EBIT margin to scale up each by 190 bps standing tall at 16.1% and 11.6%, respectively, by FY12E.
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Exhibit 22: Trend in operating margins
18.0
The operating margin is expected to ramp up and scale up to 16.1% (EBITDA) and 11.5% (EBIT) by FY12E. This is on the back of ABU turning EBIT neutral, business services volume improving in T&M, healthcare payer as well as BFSI increasing the seat fill factor and helping to cut back the operating cost
14.4 12.0 10.2 % 7.6 6.0 4.5 12.8 9.7
14.6 10.0
14.0 9.6
14.2 9.7
15.1 10.5
16.1 11.6
0.0 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 EBITDA

FY10E
FY11E
FY12E
EBIT
Marquee clientele with diversified base:

Exhibit 23: Client pyramid
Healthcare Telecom & Media BFSI ABU Five of the top 10 health Two of the top 3 UK mobile Seven of the top 10 general Three of the top mobile insurance/managed care companies, two of the top purpose credit card issuers 5 companies in the US and four broadband companies in the US, UKs largest retail companies in Indias over 800 hospitals in the in the UK, largest cable & bank and mortgage lender India, satellite TC operator in UK and a top 3 UK motor /auto leading private US out of 5000. life insurer and Australia and two of the insurer top 10 US telecom companies
The company has 33 global 2000 companies as clients include 17 Fortune 500 and eight FTSE 100 companies. Its clientele in each of its business unit includes marquee names like Bharti Airtel, Idea and Vodafone Essar in the domestic market and Barclays as well as Unirush for BFSI services.
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Risks and concerns

FCCB: As a liability stretching the balance sheet position
Exhibit 24: Scenario analysis for FCCB
Scenario I (FCCB converts into equity) Number of shares to be issued (crore) 9.0
Dilution risk(%)
FY12E PATexcls interest cost)(Rs crore) Weighted average number of shares(crore) EPS for FY12E EPS(Rs) PAT for FY13E(Rs crore) EPS for FY13E EPS(Rs) Average number of shares(crore)
21.0
210.1 45.9 4.6 241.6 4.7 51.9
% YoY growth
Scenario II(Reset of conversion price by August 2010) Estimated conversion price(Rs) Number of shares to be issued (crore)
1.7
29.0 28.7
Dilution risk(%)
FY10E EPS(RS) Number of shares outstanding in FY11 FY11E EPS
66.9
3.1 71.6 2.2
% YoY growth
Scenario II(Payback by internal accrual and partial refinancing)) Internal accrual(USD million) Obligation (with accrued interest)(USD mn) Portion to be refinanced(USD mn) Cost of refinanced debt Interest expense to pass through in Q4FY12(USD mn) FY12E PAT EPS for FY12E EPS(Rs) EBIT for FY13E @ growth of 15% Interest expense due to FCCB Interest expense due to ECB PBT
(29.6)
125 259 134 7% 2.3 190.8 4.4 321.8 41.2 23.4 257.2
Dilution risk(%)
FY13E PAT@ tax rate of 25% EPS for FY13E EPS(Rs)
192.9 4.5
% YoY growth
Scenario III(Repayment via internal accural and partial QIP) Issue price estimated Issue size needed Number of share of Rs10 face value to be issued FY12E PAT (excls interest cost)(Rs crore) Weighted average number of shares(crore) EPS for FY12E EPS(Rs) FY13E PAT @15% growth Average number of shares outstanding EPS for FY13E EPS(Rs)
1.1
38 602 15.8 210.5 48.2 4.4 242.1 58.7 4.1
% YoY growth Dilution risk(%)

(5.7) 36.9
The company has US$212 million zero coupon FCCBs outstanding as on December 31, 2009, which will mature by December 2012. The conversion price is at Rs 92, almost 3x CMP. Thus, this amount can be considered as debt resulting in gearing of 1.8x, which is very high as
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opposed to other BPO companies. This will come in as a huge liability incidence in FY12 and will stretch the companys balance sheet. According to the scenario analysis done above, Scenario I represents the ideal case resulting in highest EPS growth of 1.7% and dilution risk of 21% Followed by scenario III in which the company pays back partially by internal accrual and the rest via refinancing with no dilution risk and EPS growth of 1.1% in FY13E Scenario III assumes the QIP will be done over the next 15 months and issue price is taken close to our target price of Rs 38. This will result in high dilution risk of 37%and EPS de-growth of 6% in FY13 Scenario II, which is reset of the conversion price at the two weeks average will prove to be the most lethal with dilution risk of 67% and earnings de-growth of 30% We have assumed Scenario II for our valuations. In case the company adopts any other route i.e. scenarios highlighted above for retiring FCCBs it will pose a downside risk to our valuations.
With demand situation for talent normalising, spurt in attrition rates
The company has abnormal attrition rates of 75% (average for YTDFY10) in its domestic business. This is because people in Tier II and Tier III cities are highly price sensitive. Once demand for business services becomes robust again, these attrition rates will escalate making people management difficult and leading to unnecessary cost run-up related to training, general & administration expenses.
Attrition rates in case of the domestic business are as high as 70% whereas in offshore it is around 50% and for onshore it is around 40%
Exhibit 25: 180 days annualised attrition rates (delivery centre wise)
100 90 80 70 60 50 40 30 20 10 Q3FY09 Domestic Q4FY09 Q1FY10 Q2FY10 Q3FY10 Onshore(US & UK) Offshore(India,Argentina & Phillippines) %
Cross-currency volatility
The company has 60% of its revenue coming in from the US and Canada and 27% coming in from Europe. Thus, any steep appreciation of the US$ against the British pound and euro as well as INR appreciation against the US dollar will hurt the overall rupee realisation posing risk to our estimate.
Page 14
Financials
Niche vertical focus to support moderate revenue growth
The companys end-to-end services offering in telecom & media and strong capabilities in the healthcare vertical will drive growth, going forward. The company has grown at 45% CAGR over FY07-FY09 whereas the Indian BPO industry grew at 24% CAGR over the same period. The companys revenue growth settled down to the same growth level as the industry only in FY09 on the back of the global economic slowdown. Going forward, we expect the Indian BPO industry to grow at 12.5% CAGR over FY09-FY12E and the company to grow at 13% CAGR (CC) and 11% CAGR (rupee terms) over the same period.
Exhibit 26: Revenue growth
The Indian BPO industry is expected to grow at 13% CAGR over FY09-FY12E and has grown at 24% CAGR over FY07-FY09. At the same time, the company has grown at 45% CAGR over FY07-FY09. We expect the companys revenue to grow over FY09-FY12E at 11% CAGR
3000.0 2500.0 2000.0

Rs crore
FY09-FY12E CAGR:11% FY07-FY09 CAGR:45%
60 50 40 30 20 10 0
%
1500.0 1000.0 500.0 0.0 FY07 FY08 FY09 Revenues FY10E FY11E FY12E
YoY GROWTH
Operating margin to surge

The company heavily invested in its ABU business since H2FY09 to tap
Erosion in the operating margin (EBIT) has bottomed out and is expected to bounce back to 11.6% by FY12 on the back of the improvement in business volumes as well as turnaround in ABU by H2FY11. Even the PAT margin will scale up to 7.9% by the end of FY12E
Exhibit 27: Trend in margins
25.0 20.0 15.0 (%) 10.0 5.0 0.0 FY07 FY08 FY09 EBITDA FY10E EBIT PAT FY11E FY12E 19.9 18.0 13.2 7.9 6.3 14.2 9.7 6.7 15.1 10.5 7.5
16.1 11.6 7.9
12.2 11.6
11.4 10.0
Source: Company, ICICIdirect.com Research * Note PAT margins for FY09 are computed excluding MTM loss on FCCB
Page 15
the burgeoning business service opportunity in telecom. This was on the back of the huge penetration opportunity left for Indian telecom players as well as with the expectation of the launch of advanced technologies like 3G and WiMax. This business, which is still not EBIT neutral, is expected to turn around in H2FY11 and will start adding to profitability. In addition, with improving macroeconomic conditions, the surge in business volumes will help to increase the seat fill factor as well as cut back on SGA as investments in healthcare and T&M automatically start yielding. Thus, the EBITDA and EBIT are expected to accelerate by 19%and 27% CAGR, respectively, ahead of revenue growth expectation of 11% CAGR over FY09-FY12E. Thus, the above expected facts will provide a cushion to the EBITDA margin. They will rebound to reach 16.1% by FY12. Therefore, the net profitability is expected to surge at 20% CAGR over FY10-FY12E expanding the PAT margin to 7.9%.
Return ratios to rebound

With improving profitability and repayment of FCCBs by partial internal accrual and refinanced debt, return ratios like RoNW and RoCE are expected to bounce back to double digits i.e. 10.3% by FY12E.
The return ratios are expected to bounce back to double digit levels by FY12E i.e. 10.3% on the back of improvement in the profitability as well as payback of FCCBs via internal accruals as well as partial refinancing
Exhibit 28: Trend in return ratios
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 FY08 FY09* RONW*
Source: Company, ICICIdirect.com Research * RONW for FY09 doesnt include MTM loss on FCCB
18.0
7.4
7.9 5.0
8.8 6.5
9.4 7.1
10.3
FY10E
FY11E ROCE
FY12E
Page 16
Valuations
With the global macro environment returning to the normal course and the domestic telecom & media market gearing up for high growth phase again, the volumes for business services will bring double-digit (constant currency) growth back for the company.
Relative based valuation: Rs 38 per share

We have short-listed global peers like WNS, Genpact, EXL services and domestic peers like Hinduja Global Solution for relative valuations. On a broad basis, BPO companies are expected to have growth of 10-15% in FY12 with EBITDA margin of 15% plus in FY12. The company is trading at a heavy discount as compared to global peers on each of the following multiple basis i.e. PE(x), EV/EBITDA, price/sales (P/S).
Exhibit 29: Peer comparison
Currency Revenues FY2009 % YoY growth FY2010E % YoY growth FY2011E % YoY growth FY2012E % YoY growth EBITDA margins(%) FY2009 FY2010E FY2011E FY2012E EPS(Adjusted) FY2009* FY2010E FY2011E FY2012E BVPS FY2009 FY2010E FY2011E FY2012E RONW(%) FY2009* FY2010E FY2011E FY2012E
Firstsource* INR crore 1749.7 34.7 1953.0 11.6 2085.4 6.8 2405.4 15.3
HGSL INR crore 797.6 25.2 918.4 15.1 1094.1 19.1 NA NA
WNS USD mn 385.7 31.3 394.8 2.4 434.2 10.0 489.0 12.6
Genpact EXL Services USD mn USD mn 1119.4 7.5 1295.0 15.7 1503.0 16.1 1737.8 15.6 178.8 17.6 219.9 23.0 257.3 17.0 NA NA
13.2 14.2 15.1 16.1 INR 2.5 3.1 3.7 4.5 INR 32.2 35.3 38.9 43.4
16.7 22.2 21.0 NA INR 45.6 63.9 71.1 NA INR 477.3 511.6 573.7 NA
18.2 21.3 20.1 20.7 USD 1.0 1.2 1.4 1.7 USD 5.3 4.4 5.1 6.6
21.5 21.1 21.1 20.5 USD 0.8 0.9 0.9 1.2 USD 4.4 5.7 6.6 7.7
15.8 16.1 16.6 NA USD 0.4 0.6 0.8 NA USD 6.3 7.2 8.2 NA
7.9 8.8 9.4 10.6
9.8 14.3 15.1 NA
10.9 12.1 16.9 16.1
15.0 14.0 14.9 14.9
8.5 10.2 11.0 NA
Source: Bloomberg, ICICIdirect.com Research Note: HGSL refers to Hindustan Global Solutions Ltd * refers to calculations using PAT excluding MTM loss on FCCB
Page 17
Exhibit 30: Relative Valuations
FY2009* P/E Firstsource* HGSL WNS Genpact EXL Services Average for domestic BPO players Average for Global BPO players Discount(%) EV/EBITDA Firstsource HGSL WNS Genpact EXL Services Average for domestic BPO players Average for Global BPO players Discount(%) P/Sales Firstsource HGSL WNS Genpact EXL Services Average for domestic BPO players Average for Global BPO players Discount(%) P/BVPS Firstsource HGSL WNS Genpact EXL Services Average for domestic BPO players Average for Global BPO players Discount(%) 11.5 9.5 13.9 21.0 41.7 10.5 25.6 59.0
FY2010E 9.4 6.8 12.3 18.6 27.3 8.1 19.4 58.4
FY2011E 8.0 6.1 10.0 16.7 23.1 7.0 16.6 57.8
FY2012E 6.6 NA 8.3 13.6 NA 6.6 10.9 40.0
The stock is trading at a 58% discount to global BPO players on an average on P/E over FY09-FY11.The companys FCCBs turning into liability in Dec 12 will increase the interest incidence affecting net profitability. Hence, we value the stock at a 20% discount to global peer multiple i.e. 8.7x FY12E EPS of Rs 4.4 per share giving us a price target of Rs 39
The stock is trading at a 49% discount to global BPO players on an average on EV/EBITDA over FY09FY11. The profitability for the company is expected to get boosted i.e. we expect strong EBITDA growth of 19% CAGR over FY10-FY12E. We are valuing it at target EV/EBITDA (x) of 7.1x FY12E EBITDA of Rs 388 crore i.e. at a 10% discount to global multiple that is fair giving us a price target of Rs 38
10.6 2.3 10.2 12.9 13.7 6.5 12.3 47.3
8.8 1.5 8.6 11.4 11.0 5.2 10.3 49.7
7.8 1.3 8.2 9.8 9.1 4.6 9.0 49.3
6.3 NA 7.1 8.7 NA 6.3 7.9 19.8
The stock is trading at a 63% discount to global BPO players on an average on P/S over FY09-FY11. The sales for the company is expected to run up i.e. we expect revenue growth of 11% CAGR over FY10FY12E, lower than global peers. We are valuing it at target PS(x) of 0.6x FY12E sales per share of Rs 56 i.e. at a 60% discount to global multiples that is fair giving us a price target of Rs 36
0.7 1.1 1.6 3.1 2.8 0.9 2.5 63.5
0.6 1.0 1.6 2.6 2.3 0.8 2.2 63.0
0.6 0.8 1.4 2.3 2.0 0.7 1.9 62.7
0.5 NA 1.3 2.0 NA 0.5 1.6 67.9
0.9 0.9 2.7 3.6 2.8 0.9 3.0 70.1
0.8 0.8 3.3 2.8 2.4 0.8 2.8 70.4
0.8 0.8 2.9 2.4 2.1 0.8 2.5 69.4
0.7 NA 2.2 2.1 NA 0.7 2.1 68.3
Source: Bloomberg, ICICIdirect.com Research * refers to calculations using PAT excluding MTM loss on FCCB
Thus, on the basis of all three relative valuation methods we have arrived at the average target price for the company at Rs 38 per share. This conforms to our discounted cash flow valuation method, which also gives us a target price of Rs 38 per share. Hence, we are initiating coverage on Firstsource Solution with a target price of Rs 38 per share and STRONG BUY rating.
Page 18
Exhibit 31: Summary of relative valuations Valuation Method FY12E P/E basis Global multiple(x) 10.9 Disount for Firstsource(%) 20.0 Target multiple(x) 8.7 EPS (Rs) 4.4 Target Price (Rs) 38.9
EV/EBITDA Global multiple(x) Target multiple(x) EBITDA(Rs crore) Target EV(Rs crore) Cash & Cash equivalent(Rs crore) Debt(Rs crore) Target Mcap(Rs crore) Target price(Rs) P/Sales Global multiple(x) Discount to global multiple Target multiple(x) Sales per share(Rs) Target Price(Rs) Average Target Price
7.9 7.1 388 2755 62 838.67 1979 38.1
1.6 60 0.6 56 36.4 37.8
DCF-based valuation: Rs 38 per share

Exhibit 32: DCF based valuations
Rs crore FY10E FY11E FY12E FY13E FY14E FY15E EBITDA 278 314 388 464 555 638 Less: Tax (25) (37) (57) (68) (82) (94) Add:(Inc)/Dec in Net CA (188) (135) 129 (119) (123) (140) Operating Cash Flows 65 142 460 277 351 404 Add:(Inc)/Dec in Net FA (57) (46) (75) (59) (42) (43) Free Cash Flows(FCF) 8 96 385 218 309 361 Discounting Factor 1.0 0.9 0.8 0.7 0.7 0.6 PV of FCF 8 86 311 158 202 212 Total Primary value of FCF 1,911 Terminal value of FCF 3,010 Rs crore Assumptions DCF Valuation PV of firm 4,920 WACC Less: Current Debt 1,395 Revenue CAGR Total present value of the Equity 3,526 (FY10-FY19E) Add:Cash & Cash equivalent 225 Terminal Growth Add/(Less):Goodwill (2,140) Tax rate Value of Equity 1,611 EBITDA(%) Number of equity shares 43 38 Value per equity share in Rs. FY16E FY17E FY18E FY19E 728 815 888 959 (107) (120) (131) (141) (158) (190) (132) (104) 462 505 626 714 (48) (49) (43) (60) 414 456 583 654 0.5 0.5 0.4 0.4 218 216 249 251 -
11.2% 14.7% 3.5% 23.0% 17%
Page 19
Table and Ratios

Growth in total sales in FY11 in rupee terms looks muted on the back of strong rupee against US dollar and GBP in FY11 i.e. 45.7 and 72.5, respectively, as opposed to the favourable rupee in FY10E i.e. at 48 and 76 against US$ and GBP respectively. Thus, in constant currency we expect growth of 13% CAGR over FY09-FY12E but in rupee terms it will translate to 11% CAGR over the same period Personnel expenses as a percentage of sales will escalate with the addition of more employees and wage inflation in FY10E and FY11E but will stabilise in FY12 considering the improving demand scenario that will help the company to pass on the cost with marginal uptick in pricing. Also, the S&M investments made in healthcare and T&M will start yielding leading to lower operating expense as percentage of sales On the back of the abovementioned factors, the EBITDA and EBIT is expected to pace up at 19% and 27% CAGR, respectively, over FY09-FY12E outperforming revenue growth and aiding margins
Exhibit 33: Profit & loss statement
(Year-end March) Total Sales % Growth Operating Expenses % of Sales Personnel Expenses % of Sales Total Expenditure % Growth Operating Profit % Growth Other Income Depreciation EBIT % Growth Interest Profit before Tax % Growth Taxation Net Profit before MI Minority Interest Net Profit(Incl FCCB MTM) Net Profit(Excl FCCB MTM)
FY08 1,298.7 56.3 352.8 27.2 712.0 54.8 1,064.8
FY09 1,749.7 34.7 497.1 28.4 1,021.1 58.4 1,518.3 42.6 231.4 (1.1) 29.8 93.6 137.9 (6.7) 116.7 51.0 (64.7) 19.9 31.1 0.1 31.0 108.8
FY10E 1,953.0 11.6 491.7 25.2 1,183.0 60.6 1,674.7 10.3 278.3 20.2 22.0 89.7 188.6 36.8 51.8 158.8 211.3 25.4 133.4 0.4 133.0 133.0
FY11E 2,085.4 6.8 500.3 24.0 1,270.8 60.9 1,771.0 5.8 314.4 13.0 10.9 96.0 218.3 15.8 34.6 194.6 22.6 37.0 157.7 0.4 157.3 157.3
(Rs Crore) FY12E 2,405.4 15.3 553.2 23.0 1,464.1 60.9 2,017.4 13.9 388.0 23.4 19.6 108.2 279.8 28.1 51.1 248.4 27.6 57.1 191.2 0.4 190.8 190.8
233.9 41.2 34.9 86.1 147.8 45.6 38.1 144.6 12.7 130.5 (1.0) 131.5 131.5
The interest expense component will shoot up in FY12E as we factor in refinanced debt in Q3FY12 with interest rate as high as 7% to pay up for FCCBs obligation required in addition to internal accruals
Page 20
Exhibit 34: Balance sheet
The capital employed will scale down in FY12E as the company will repay its FCCBs via internal accrual and partial refinancing
(Year-end March) Liabilities Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions Minority Interest Total Liabilities Assets Gross Block Less Accumulated Depreciation Net Block Capital WIP Total Fixed Assets Goodwill Investments Loans & Advances Cash Sundry Debtors Unbilled revenue Total Current Assets Deferred Tax Assest,net Total Asset
FY08 427.3 312.7 59.7 1,195.5 605.2 3.6 2,604.0
FY09 428.1 951.2 185.6 1,209.0 263.9 5.5 3,043.3
FY10E 429.1 1,084.3 292.7 1,096.4 253.7 5.2 3,161.4
FY11E 429.1 1,241.5 292.7 1,096.4 255.9 5.2 3,320.8
(Rs Crore) FY12E 429.1 1,432.4 292.7 546.0 282.4 5.2 2,987.8
534.0 634.8 691.9 737.9 813.0 320.4 415.8 505.4 601.5 709.7 213.6 219.1 186.5 136.5 103.3 8.9 7.0 9.0 9.0 5.0 222.5 226.1 195.5 145.5 108.3 1,888.0 2,287.5 2,139.7 2,133.0 2,133.0 22.1 1.8 125.0 203.6 10.0 105.1 102.5 205.4 40.0 452.9 18.4 2,604.0 118.7 96.7 237.9 60.5 513.8 14.1 3,043.2 230.0 100.0 292.2 69.1 691.2 10.0 3,161.4 276.0 175.6 302.8 74.3 828.7 10.0 3,320.8 278.8 52.3 329.5 65.9 726.5 10.0 2,987.8
Exhibit 35: Cash flow statement
(Year-end March) Profit after Tax Depreciation (Inc)/Dec in Deferred Tax assest Cash Flow before WC Changes Net Increase in Current Liabilities Net Increase in Current Assets Cash Flow after WC Changes (Inc)/Dec in goodwill (Inc)/Dec in loans and advs Purchase of Fixed Assets Increase / (Decrease) in Investments Cash Flow from Investing Activities Inc / (Dec) in Loan Funds Inc / (Dec) in Equity Capital Addition to reserves on amalgamation Dividends Cash Flow from Financing Activities Op bal Cash & Cash equivalents Closing Cash/ Cash Equivalent
FY08 132.9 86.1 (18.4) 200.6 468.4 (39.7) 428.8 (1,346.1) (43.9) (128.4) 93.1 (1,425.3) 1,057.6 (326.6) (133.0) 598.0 301.0 102.5
FY09 31.0 93.6 4.4 129.0 (341.3) (53.0) (394.3) (399.5) (13.7) (97.1) 20.3 (490.0) 139.4 639.3 (31.0) 747.7 102.5 96.7
FY10E 133.0 89.7 4.1 226.8 (10.2) (62.8) (73.0) 147.8 (111.3) (59.1) (123.2) (145.8) (5.5) 134.1 (133.0) (4.5) 96.7 100.0
FY11E 157.3 96.0 253.3
(Rs Crore) FY12E 202.9 108.2 311.2 28.9 (51.3) (22.4) (27.6) (75.0) (121.8) (224.4) 202.9 (202.9) (0.0) 175.6 240.1
2.2 (15.9) (13.7) 6.7 (46.0) (46.0) (78.6) (164.0) 157.3 (157.3) 0.0 100.0 175.6
Page 21
Exhibit 36: Ratios (Year-end March) Per Share Data (Rs) EPS Cash EPS Book Value Operating Profit Per Share
FY08 3.1 5.1 17.3 5.5
FY09 0.7 2.9 32.2 5.4
FY10E 3.1 5.2 35.3 6.5
FY11E 3.7 5.9 38.9 7.3
FY12E 4.5 7.0 43.4 9.0
Operating Ratios Operating Margin (%) Net Profit Margin (%) Return Ratios RoE (%) RoCE (%) Valuation Ratios EV/EBITDA PE EV/Sales Sales to Equity Market Cap to sales Price to Book Value Turnover Ratios Fixed Assets Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Cash to Absolute Liabilities Solvency Ratios Debt/Equity Current Ratio Quick Ratio
18.0 9.9
13.2 1.7
14.2 6.7
15.1 7.5
16.1 7.9
18.0 7.4
2.2 5.0
8.8 6.5
9.4 7.1
10.3 10.3
10.5 9.4 1.9 1.8 1.0 1.7
10.6 11.5 1.4 1.3 0.7 0.9
8.8 9.4 1.3 1.3 0.6 0.8
7.8 8.0 1.2 1.2 0.6 0.8
6.3 6.6 1.0 1.3 0.5 0.7
5.8 6.3 7.4 0.2
7.7 7.4 7.0 0.4
10.0 6.7 7.9 0.4
14.3 6.9 8.1 0.7
22.2 7.3 8.1 0.2
1.7 0.7 0.6
1.0 1.9 1.5
0.9 2.7 2.3
0.8 3.2 3.0
0.5 2.6 1.6
Exhibit 37: DuPont analysis FY08 PAT / PBT 91.0 PBT / EBIT 97.8 EBIT / Sales 11.4 Sales / Assets 5.8 Assets / Equity 0.3 RoE 17.8
FY09E 60.8 37.0 7.9 7.7 0.2 2.2
FY10E 83.8 84.2 9.7 10.0 0.1 8.8
FY11E 80.8 89.1 10.5 14.3 0.1 9.4
FY12E 76.8 88.8 11.6 22.2 0.1 10.3
Page 22
Annexure
Excerpts from Nasscom- Perspective 2020 report
Business services (i.e. BPO) will overtake technology services and become the largest export oriented opportunity with a total addressable export market of US$610-670 billion by 2020 Core markets, which include verticals like BFSI and telecom as well as developed geographies like North America and Western Europe, are expected to expand up to 1.5 times by 2020. This highlights that Firstsources other key verticals like BFSI and telecom & media will continue to present strong growth opportunities for the company. Thus, the size of Firstsources addressable market under BFSI will scale up to US$125-135 billion and US$20-25billion under the telecom segment by 2020. As economic growth gathers pace in BRIC geographies, their domestic outsourcing opportunity will grow from US$380 billion to US$420 billion. China will represent around 50% of the BRIC opportunity, followed by India at around 25%. This envisages strong growth opportunity for the ABU with the size for Firstsources addressable market under ABU segment at US$60-65 billion New verticals that have limited adoption of global sourcing today (public sector, healthcare, media and utilities) are expected to emerge. An addressable opportunity of around US$190 billion to US$220 billion is expected to open up by 2020. Healthcare providers and the public sector will contribute over 70% of the opportunity. This corroborates robust growth potential for Firstsources healthcare provider segment. Thus, the size of Firstsources addressable market under the healthcare provider segment is pegged at US$50-55 billion while another US$30 billion is under the healthcare payer segment.
As per Nasscom Perspective 2020, new geographies like BRIC nations, new verticals like public sector, healthcare, media & utilities will add to incremental IT-BPO spend by 2020 in addition to growth in IT spend in core markets & core verticals
Exhibit 38: Total addressable market for global sourcing & domestic outsourcing,2020
380-420 230-250 500 200-250 190-220
1500-1640
Core markets
Growth in New verticals core markets in developed countries -6 verticals** -North America, Western Europe,Japan -Large enterprises -Public sector -Healthcare -Media* -Utilities
New customer segments -SMBs
Outsourcing market in new geographies -Brazil -Russia -China -India
Source: NASSCOM Perspective 2020, ICICIdirect.com Research * Printing & Publishing ** BFSI, Telecom, Retail, Pharma, Manufacturing ,Travel
Thus, the companys strong capabilities under each of the abovementioned segments will help it to tap the burgeoning opportunity and achieve strong growth in the long run.
Page 23
Global T & M market

The key industry trends being witnessed in the companys target telecommunications and media segments are as under: Mobile/wireless Topline growth and average revenues per user (ARPU) are tapering off with players now focusing on consolidation and efficiencies through reengineering initiatives and cost reductions. Hence, outsourcing/right-shoring is finding increased interest. Broadband/high speed internet - New customer additions now picking up again and roll out of super fast broadband network presents an incremental opportunity for a spurt in volumes for inbound sales. Fixed/wire line The emerging trend of UK wireless operators cross selling fixed line to their internet service providers (ISP) clients will increase the ARPU. Some opportunities will support cost cutting initiatives for enterprise clients. DTH/Pay TV Under the current recessionary environment, the segment is gaining importance as customers are cutting back on going out and prefer to stay at home resulting in higher service usage. There is also a demand for bundled packages and triple play. Thus, business volumes are now showing a positive trend. Development of IPTV offerings and HDTV offerings also present an opportunity for business services.
Domestic telecom market

The majority of the Indian population i.e. 61% resides in Tier II, Tier III cities and villages, which is represented by B and C circles. These areas are still under penetrated
Exhibit 39: Population distribution circle wise (Q3FY10)
17%
6%
33%
44% Metro Total

Source: TRAI, ICICIdirect.com Research
A circle
B circle
C circle
As highlighted below each of these circles are expected to have strong subscriber growth, going forward, with B and C circles outlined to grow at a scorching pace of 31% and 42% CAGR over FY09-FY12E (Exhibit 24). This will help the overall wireless teledensity to reach 68% by FY12 translating into burgeoning volumes for business services providers.
The subscriber base in B and C circle will grow at a scorching pace of 31% and 42% CAGR over FY09FY1E
Exhibit 40: Subscriber Information (Circle wise)

Subscriber (crore) M etro A C ircle B C ircle C C ircle India FY09 6.2 13.5 14.4 4.5 38.6 FY10 8.2 19.3 22.2 7.8 57.5 FY11 9.4 23.1 28.0 10.5 70.9 FY12 10.1 25.7 32.7 12.9 81.3 CAGR 17.8% 23.8% 31.4% 42.3% 28.2%
Page 24
Exhibit 41: Teledensity circle wise

Teledensity in B and C circle is expected to double over FY09-FY12E presenting huge volume opportunity for business services
140 120 100 80 % 60 40 20 FY08 FY09 Q1FY10 Q2FY10 Q3FY10 A circle B circle 23 34 73 37 40 46 95 99 105 114
118
126
129
49
60
68
FY10E
FY11E
FY12E
Metro Total
C circle
India total
Medicare
Medicare is a social insurance programme administered by the US government, providing health insurance coverage to people aged 65 and over or who meet other special criteria. The programme also funds residency training programmes for the vast majority of physicians in the US.
Medicaid
Medicaid is the US health programme for eligible individuals and families with low incomes and resources. It is a means tested programme that is jointly funded by the states and federal governments and is managed by the states. Among groups of people served by Medicaid are certain eligible US citizens and resident aliens, including low-income adults and their children and people with certain disabilities. Poverty alone does not necessarily qualify an individual for Medicaid. It is estimated that approximately 60% of poor Americans are not covered by Medicaid. Medicaid is the largest source of funding for medical and health-related services for people with limited income in the US. On account of the aging Baby Boomer population, the fastest growing aspect of Medicaid is nursing home coverage.
Services offered to healthcare payers
Page 25
Services offered to healthcare providers
Services offered to telecom & media
Services offered to BFSI
Page 26
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai 400 093 research@icicidirect.com pankaj.pandey@icicisecurities.com
ANALYST CERTIFICATION
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First Solution EQUITY RESEARCH REPORT

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Initiating Coverage

March 18, 2010

Firstsource Solutions Limited (FIRSOU)

IT is enabled (ITeS) to ride the recovery

YoY Growth (%)

Focus on healthcare, telecom & media (T&M) to catapult growth

Price movement (Stock vs. Nifty)

Profitability to head northwards

FCCB: No longer a risk due to strong profitability

6M -18.1 -11.9 47.4 (2.7)

12M 147.3 332.0 344.9 6.9

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)

US(including canada) UK India Rest of world

FY07 47.3 48.7 3.8 0.2

FY08 54.0 35.0 10.8 0.1

FY09 63.0 26.0 10.8 0.3

9MFY10 60.2 27.0 12.1 0.6

Total 3045 6654 13575 3510 26784 524 27308

Exhibit 4: Revenue mix by delivery (%)

Offshore Domestic Onshore

FY07 64.9 3.8 31.3

FY08 39.6 10.8 49.6

FY09 30.5 10.8 58.8

9MFY10 29.0 12.1 58.8

Exhibit 5: Revenue mix(Industry wise )

BFSI Telecom & Media Healthcare others

FY07 51.8 34 9.1 5.1

FY08 30.8 36.0 29.8 3.4

FY09 25.2 32.4 39.9 2.5

9MFY10 22.6 37.6 38.0 1.9

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)

Source: Company, ICICIdirect.com Research

MedAssist acquisition: A Synergistic move

Metavante: A strategic but inactive partnership

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)

Exhibit 7: Trend in worldwide BPO spend

Worldwide BPO spend

Exhibit 8: Indian BPO industry trend

FY04-FY09 CAGR:34% 53 12.5 9.5 32 32

10 7.2 5.2 5 3.4

0 FY04 FY05 FY06 FY07 FY08 YoY FY09

Total Indian BPO

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)

Exhibit 9: Trend in Indian BPO industry growth

Indian BPO industry

FY08 Total BPO Exports Total Domestic spend

FY09 Total BPO

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)

Exhibit 11: Trend in Firstsources revenue growth

60 50 40 30 20 10 0 FY10E FY11E FY12E %

Focus on niche verticals like healthcare and telecom to drive growth

Exhibit 12: Revenue mix by segments (YTDFY10)

Telecom & Media

Asia Business Unit

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Firstsource Solution Limited (FIRSOU)