Buy Firstsource Solutions; target of Rs 87: ICICI Direct

ICICI Direct’s research report on Firstsource Solutions

Revenues from operations grew 1.1% QoQ to | 897.3 crore and were below our 4.9% growth and | 930.4 crore estimate At 14.8%, EBITDA margins expanded 170 bps QoQ and were way above our 13.5% and 40 bps expansion estimate. Healthy margin expansion took place on account of lower-than-expected employee expenses (67.2% as a percentage of revenue vs. 68% expectation) and lower other expenses (down 2.7% QoQ)

Outlook

This, accompanied by an improved margin trajectory for FY19E, could lead to earnings growth of ~14% CAGR in FY18-20E. With a healthy dividend payout and becoming net long term debt free by October, 2018, we believe FSL could witness a re-rating, going ahead. Hence, we maintain our BUY recommendation on the stock with a revised target price of | 87 per share (14x FY20E EPS).

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