First Source Solutions- A Safe & HighPotential Multibagger CMP 64.6

August 13, 2018

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Strategic Alpha

Firstsource-Logo_96dpi

Firstsource Solutions is a leading BPO company. Its focus areas are healthcare, telecommunications, Media, Banking, and financial services. The company has over 100 clients, across various geographies.

For more info check, http://www.firstsource.com

Numbers- The latest
CMP on Day13 Aug 2018 64.60 Market cap: 4457 crores BV: 33.98 FV: 10
Consol revenue FY18: 3535 cr Net profit: 327 cr FY18 EPS: 4.76 RsFY18 Debt: 14 cr Apx(Long Term). Cash and Cash Equivalents 157Cr.
BRIEF HISTORY
Originally established in 2001 as ‘ICICI Infotech’ by ICICI bank. Change of name to ‘ICICI Onesource’ in 2002. Name changed again, to ‘Firstsource solutions Ltd’ in 2006. Listed on Indian stock exchange in the year 2007. RPG Group Acquired FSL and is the New Owner from 2012 Oct.

MULTIBAGGER POTENTIAL

The company on the Right track with Debt Reduction With Free Cash Flows:
1. Consistent growth in revenues during the last 10 Years.
Cons revenue Q1FY2019 919Cr Vs [Q4 FY2018: 897 cr, Q1 FY2018: 878 cr]
2. Consistent Reduction in Debt over the last 6 Years, thereby improving profitability.

Its Net Debt has reduced from 2112 Cr(Working Capital+Longterm) in FY12 to 672Cr (Mostly Working Capital Loan) Cr in FY18. Its Free cashflow Increased from -115Cr in FY15 to 84 Cr in FY18 and would continue to be on rising in coming years due to Zero Longterm Debt

3. The company has done very well in capturing revenue per employee for the last 10 years as its Headcount Dropped to 18800 Employees in FY18 Vs 25000+ Employees in FY12 Whereas its Revenues have gone Up from 2200 Cr in FY12 to 3500Cr in FY18.

INTERESTING INFO
1. Company’s IPO Price was 64 in 2007, Now after Passing 11 Years Stock has Recently Crossed its IPO Price whereas Company has gone through a transformation in the same Period. 2007 Annual Revenue was around 831 Cr whereas in FY18 Annual Revenues have crossed 3535Cr. Net Profit in FY07 was 97 Cr whereas Net Profit is 327Cr in FY18. Annualized EPS in 2007 was 2.27 Rs whereas Annualised EPS in FY18 is 4.76.

2.FSL has substantially Improved its Operating Profit Margins in the last 6 Years. OPM in FY12 was Around 8.6% which Improved substantially to 13.6% in FY18 which shows their efficient Manpower cost control processes and Innovation in their high margin services.

3. FSL has posted a Maiden Dividend of 1.5 Rs for FY19 Which Yields around 2.3% at CMP. I Expect to go up to 2.5 Rs for the Next FY and 3-3.5 Rs in Comming Years due to better cashflows.

4. Ace investor Rakesh Jhunjhunwala, Holds 2 cr shares in Firstsource (2.9% Apx)

5. Recently many Funds like Taurus AMC and others have added FSl in their Schemes. ICICI Group Holds 4.7% stake, HDFC Asset Management 2.9% stake including 18.7Lakh Shares added in the recent Qtr. Mr. Rajesh Subramaniam(MD& CEO) has Bought 13 Lakh Shares in the Past Qtr.

NEGATIVES- KEY RISKS

1. Though the company Hedges 58% of its Revenues currently, there is a risk of Forex Losses if it’s not taken care of.

2. Employee attrition for FSL is High Around 47% which is in Normal Case around 38-40%. In Outsourcing business retaining talent is a big challenge and any negative change in this scenario could impact the business.
MY TAKE
Though Firstsource is technically a midcap stock (<4500 cr market cap); the reality is a little different. It is a large company that employs around 19000 people, operates 48 delivery locations across 5 countries(India, US, UK, Philippines, and Sri Lanka), manages approx 85% repeat business from existing clients, with annual revenues of over 3000 cr. With RPG Group at the helm, we can expect stronger execution capabilities as they have already proved it with the massive reduction in Debt. This is a Perfect Example of “Growth at a Reasonable price” as Buffet Says.

FSL is Nicely Placed to Become a Multi-bagger form Here in Next 1-2-2.5 years. Will be able to see the Levels of 120-150-180. Patience and Conviction is the need of the Game.

FSL is thus a robust potential multi-bagger and Growth at a Reasonable Price!!

Important Note: Potential multi-baggers are those stocks that have the potential to give 100 – 500% profits. Obviously, such returns take time. Probably 3 – 4 years or more. Short-term volatility is the reality of the stock market and that will always happen. Short-term movements(upside and downside) are impossible to predict. Only invest funds that you will not need for the next 3 – 4 years. As long as you buy a stock for the right reason and are convinced about the future prospects of the company, there is no need to worry if the share price goes down and stays down for a period of time after you buy; provided you have followed the cardinal stock market mantra BUY LOW.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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