first solution equity research report

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March 18, 2010

ICICIdirect.com | Equity Research

nitiating Coverage

IT is enabled (ITeS) to ride the recovery…Firstsource Solution Ltd, a pure BPO player, has a hybrid offshore-onshore presence and is set to tap the increasing spend on businessservices by the healthcare and telecom industries. With the Indian BPOindustry expected to grow at 12.5% CAGR over FY09-FY12E, thecompany, that has always outperformed industry growth, is slated togrow at 13% CAGR (in constant currency) and 11% CAGR (in rupeeterms). We are initiating coverage on Firstsource Solution Limited witha STRONG BUY rating and a target price of Rs 38.

Focus on healthcare, telecom & media (T&M) to catapult growthThe company has a strong foothold in the end-to-end business services

offerings for healthcare provider and payer segment (38% of revenue) aswell as the T&M industry (38% of revenue). These verticals are expectedto grow at 9% CAGR and 21% CAGR, respectively, over FY09-FY12E. Inaddition, the Asia business unit (ABU), which again has T&M as prime focus, is outlined to grow at 17% CAGR. Together, these verticals willpropel the company’s revenue to growth of 11% CAGR over FY09-FY12E.

Profitability to head northwardsThe company’s move to turn ABU EBIT neutral by H2FY11, expected pentup volumes for healthcare as well as T&M industries in the UK, US and aburgeoning domestic telecom market will help to improve seat fill factors& scale down SGA, aiding margins. We expect EBIT and PAT to grow at ascorching pace of 27% and 21% CAGR, respectively, over FY09-FY12E.

FCCB: No longer a risk due to strong profitabilityWe believe the company’s US$212 million outstanding FCCB, which isdue in Dec ‘12 is like debt as the conversion price of Rs 92 will be easilyrepaid on the back of strong internal accruals (I-direct estimate: US$120million) with improving profitability and viable refinancing option for therest with debt to EBITDA of 2.7x FY11 EBITDA.

ValuationsAt the CMP of Rs 29, the stock is trading at 7.5x FY12E EPS. We value thestock at Rs 38 per share, which we have arrived at on a combination ofrelative valuation methods with companies like WNS, Genpact and EXL asbenchmark. 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

(Rs Crore)

(Year-end March) FY08 FY09* FY10E FY11E FY12E

Net Sales (Rs crore) 1,298.7 1,749.7 1,953.0 2,085.4 2,405.4

EBITDA (Rs crore) 233.9 231.4 278.3 314.4 388.0

Net Profit (Rs crore)* 131.5 108.8 133.0 157.3 190.8

EPS (Rs) 3.1 2.5 3.1 3.7 4.4

P/E (x) 9.4 11.4 9.3 7.9 6.5

Price / Book (x) 1.7 0.9 0.8 0.7 0.7

EV/EBITDA (x) 10.5 10.6 8.8 7.8 6.3

RoE (%) 18.0 2.2 8.8 9.4 10.3

RoCE (%) 7.4 5.0 6.5 7.1 10.3 Source: Company, ICICIdirect.com Research

* refers to FY09 net profit number which excludes MTM loss on FCCB

Firstsource Solutions Limited (FIRSOU)

Rs 29.0

ating Matrix

ating : Strong Buy

arget : Rs 38

arget Period : 12 months

otential Upside : 31%

oY Growth (%)

FY09 FY10E FY11E FY12E

et Sales 34.7 11.6 6.8 15.3

BITDA -1.1 20.2 13.0 23.4

et Profit -17.3 22.3 18.2 29.1

PS -17.3 22.4 17.5 29.1

FY09 Net profit without MTM loss for FCCB

tock Metrics

loomberg/Reuters Code FSOL.IN/FISO.BO

ensex 17383

verage volumes 1,646,000

Market Cap (Rs crore) 1,238

2 week H/L 40.0 / 10.9

quity Capital (Rs crore) 429.1

romoter's Stake (%) 21.4

I Holding (%) 7.2

II Holding (%) 5.0

rice movement (Stock vs. Nifty)

0

20

40

60

M a r - 0 9

A p r - 0 9

J u n - 0 9

J u l - 0 9

S e p - 0 9

O c t - 0 9

D e c - 0 9

J a n - 1 0

M a r - 1 0

0

1500

3000

4500

6000

FIRSOU(L.H.S) NIFTY(R.H.S)

eer comparison

eturn % 1M 3M 6M 12M

irstsource -5.3 -15.6 -18.1 147.3

induja Global -0.5 -4.5 -11.9 332.0

clerx 13.0 26.9 47.4 344.9

ambridge soln -13.5 (23.2) (2.7) 6.9

arget Multiple


arget PE 14.9 12.2 10.4 8.0

V/EBITDA 10.6 8.8 7.8 6.3

rice/BV 0.9 0.8 0.8 0.7

nalyst’s name

Srishti Anand

[email protected]



Firstsource Solution Limited (FIRSOU)


Company Background

Firstsource Solution Ltd was founded by ICICI Ltd in December 2001. Thecompany is among the top three pure play BPO companies in India as perNasscom 2009 rankings. It offers a full range of business processmanagement services across the customer life cycle from customer

acquisition, customer care, transaction processing, billing & collectionsand business research & analytics. It has 33 global 2000 companies asclients including 17 Fortune 500 and eight FTSE 100 companies. Keyindustries 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 deliverylocations.

Exhibit 2: Revenue mix by geography (%)

FY07 FY08 FY09 9MFY10

US(including canada) 47.3 54.0 63.0 60.2

UK 48.7 35.0 26.0 27.0

India 3.8 10.8 10.8 12.1Rest of world 0.2 0.1 0.3 0.6

Source: Company, ICICIdirect.com Research

Almost 80% of the employee are located offshore i.e. India, Philippinesand Argentina. In fact, 50% of the total employee base is in the Asiabusiness unit while 30% of the employees are located in offshore centresto deliver services for US healthcare, global telecommunication & mediaand BFSI industry clients.

Exhibit 3: Employee split by vertical and delivery centres

US UK India Phillipines Argentina Total

Healthcare 2200 845 3045

Telecommunication & Media 1782 4472 312 88 6654

Asia business unit 13575 13575

BFSI 1258 2052 200 3510

Total Technical employees 3458 1782 20944 512 88 26784

Sales & Support 0 0 433 91 0 524

Total employees 3458 1782 21377 603 88 27308

Onshore Offshore


Exhibit 4: Revenue mix by delivery (%)

FY07 FY08 FY09 9MFY10Offshore 64.9 39.6 30.5 29.0

Domestic 3.8 10.8 10.8 12.1

Onshore 31.3 49.6 58.8 58.8 Source: Company, ICICIdirect.com Research

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 clientslargely in the telecom & media business and BFSI

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

The onshore delivery centres are the major

contributors to revenue because effort from thehealthcare 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 industryExhibit 5: Revenue mix(Industry wise )

FY07 FY08 FY09 9MFY10

BFSI 51.8 30.8 25.2 22.6

Telecom & Media 34 36.0 32.4 37.6

Healthcare 9.1 29.8 39.9 38.0others 5.1 3.4 2.5 1.9


Overall, healthcare and telecom & media are the

dominant contributors with 76% contribution to

revenues (this includes Indian T&M clients also). The

company’s healthcare vertical contribution was

scaled up by the acquisition of MedAssist in August

2007 (Q2FY08)

hareholding pattern (Q3FY10)hareholders % holding

romoters 21.4

thers 66.4sitution 12.18





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 T & M BFSI ABU

Key Market

US US, UK and

Australia

US and UK India

Key Segments Healthcare Payer

& Healthcare

Provider

Wireless &

Mobile, Cable &

Satellite TV,

Broadband and

Fixed line

Credit cards,

Retail Banking,

Mortgages and

General

Insurance

Telecom & Media

and BFSI

Employee Strength 3045 6654 3510 13575

Seats 3414 4140 3109 8174

Seat fill factor 73% 82% 85% 79%

Addressable market

opportunity(2020)

US$50-55 bil lion US$20-25 bil lion US$155-165

billion

US$60-65 billion

Delivery centers US and India UK, India,

Philippines &

Argentina.

US, India and

Philippines

India


MedAssist acquisition: A Synergistic moveThe company scaled up its healthcare vertical via the acquisition ofMedAssist in August 2007 (i.e. Q2FY08) for 3.3x CY06 sales i.e. US$333million. MedAssist was a pan-American leading provider in revenue cyclemanagement and had service offerings to address the entire revenuecycle 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 of5,000 hospitals in the US and already has a substantial market share. Themost important aspect was that billing was 100% outcome based with animpressive EBITDA margin of 22-24% at that time. This acquisition gavethe company a strong foothold in the North American market with over1,400 employees all based out of 23 delivery centres in the US. Post theacquisition also, the healthcare vertical demonstrated strong revenuegrowth of 89% YoY in FY09 and managed to maintain positive growth of8% YoY in YTDFY10.

Metavante: A strategic but inactive partnershipFirstsource entered into a strategic partnership in August 2006 with

Metavante, which provides financial solutions, payment solutions andconsulting & professional services. Metavante has a 20% stake inFirstsource. This partnership entitles the company to have access toMetavante’s 1000+ clients. This channel, which was expected to helpFirstsource break into many mid-size banks in the US, has not reallyyielded much for the company. Hence, the BFSI vertical, which is a majorspender on BPO services globally, has failed to prove to be a growthdriver for the company and has been a laggard over the past two years.





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 theIndian BPO industry has grown over the same period. According toNasscom SR2009, the worldwide BPO spend should grow at 11% CAGRover CY09-CY12 reaching US$181 billion by the end of CY12.

Exhibit 7: Trend in worldwide BPO spend

103

115

131

146

164

181

0

20

40

60

80

100120

140

160

180

200

CY2007 CY2008 CY2009 CY2010 CY2011 CY2012

U S D b i l l i o

n

Worldwide BPO spend

CY09-CY12 CAGR:11%

CY07-CY09

CAGR:13%

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 overthe past five years, i.e. FY04-FY09 ( Exhibit 8).

Exhibit 8: Indian BPO industry trend

3.4

5.2

7.2

9.5

12.5

14.7

53

38

18

3232

0

5

10

15

FY04 FY05 FY06 FY07 FY08 FY09

U S D b i l l i o n

0

10

20

30

40

50

60

%

Total Indian BPO YoY

FY04-FY09 CAGR:34%

Source: Nasscom, ICICIdirect.com Research

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

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





Exports have been the major contributor with 87% contribution. It hasgrown at 33% CAGR over the same period with the rest coming in fromdomestic spend, which has grown at 45% CAGR over FY04-FY09. TheIndian 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 theonset 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 mergerand acquisition in the BPO space as large multinational corporationsmade a move to hive off their captive BPO and sell them off as these non-core activities proved to show cost run-ups. At the same time, the costadvantage of offshoring came into the limelight with companies askingvendors to offshore more of their business process. Thus, in the backdropof the economic slowdown, even if we assume that Indian IT BPO will justbe able to maintain a share of 13% if not increase it, the Indian BPOindustry can be expected to grow at 12.5% CAGR over FY09-FY13E toreach US$23.5 billion by FY13E ( Exhibit 9).

Exhibit 9: Trend in Indian BPO industry growth

9.5

12.5

14.7

17.0

19.0

21.423.5

0

5

10

15

20

25

FY07 FY08 FY09 FY10E FY11E FY12E FY13E

U S D b i l l i o n

Indian BPO industry

FY09-FY13 CAGR:12.5%

FY07-FY09

CAGR:24%


Exhibit 10: Trend in YoY revenue growth for Firstsource and the Indian BPO industry

5256

16

34

22

29

40

343536

34

18

0

10

20

30

40

50

60

FY07 FY08 FY09

( % )

Firstsource Total BPO Exports Total Domestic spend Total BPO


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 to13% 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

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





Firstsource Solutions has always grown at a more rapid pace as opposedto revenue growth shown by Indian BPO exports and domestic spend(Exhibit 10). Thus, even if the Indian BPO industry grows at theabovementioned rate, Firstsource can easily grow at our estimate of 13%CAGR (in constant currency) and 11% CAGR (in rupee terms) over FY09-FY12E (Exhibit 11). Thus, the continued growth momentum of the Indian

BPO industry on the back of the increasing trend of outsourcing businessservices will also help companies like Firstsource to scale up further.

Exhibit 11: Trend in Firstsource’s revenue growth

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

FY07 FY08 FY09 FY10E FY11E FY12E

R s c r o r e

0

10

20

30

40

50

60

%

Revenues YoY GROWTH


Focus on niche verticals like healthcare and telecom to drive growth

Firstsource Solution’s 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 thedomestic T&M and BFSI clients to a certain extent.

Exhibit 12: Revenue mix by segments (YTDFY10)

22.3

25.7

38.7

11.7

BFSI Telecom & Media Healthcare Asia Business Unit


The company has grown at 45% CAGR over FY07-

FY09. We expect it to grow at 13% CAGR (CC) and

11% CAGR (rupee terms) over FY09-FY12E

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





US healthcare industry: A mammoth opportunity for business services

According to January 2009 estimates, technology research firm IDCexpects US BPO services in healthcare to reach $5.3 billion in CY12, at aCAGR of 14.6% from CY07 levels. Spending on BPO services in CY09 isestimated to be at $3.5 billion. The company derives almost 38.7% of itsrevenues from the US healthcare industry by providing business servicesto 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, eligibilityservices, receivables management and collections services. Healthinsurance costs are rising faster than wages or inflation. Also, medicalcauses were cited by about half of bankruptcy filers in the US in 2001. Arecently released report on the latest figures showed that the US spent$2.5 trillion, $8,047 per person, on healthcare in 2009. This amountrepresented 17.3% of the economy, up from 16.2% in 2008, whereas theaverage is around 9% of GDP globally.

Exhibit 13: Break-up of healthcare spend in US (%)

31

2110

8

7

23

Hospital care Physician Services Pharmaceuticals

Nursing Homes Administrative cost Others

Source: Congressional Budget Office (CBO), ICICIdirect.com Research

Exhibit 14: Healthcare insurance status (Under 65 yrs of age :80% of US population)

59

13

3

6

3

16

Employer sponsored health insurance Medicaid

Medicare Non-group health InsuranceMilitary Health care Not insured

Source: Council of Economic Advisors(CEA), ICICIdirect.com Research

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 othercategories (diagnostic laboratory services,pharmacies, medical device manufacturers, etc.)Thus, the 7% administrative spend that can beoutsourced to Indian BPO players presents amammoth opportunity for Firstsource

Almost 59% of the US population isinsured by employers. As theunemployment rates go down thisshare will increase further translatinginto higher volumes for the companyfor its healthcare payer business





Government programmes as major volume booster for businessservices in healthcare provider segment:Government programmes directly cover 27.8% of the total population (83million), including the elderly, disabled, children, veterans and some ofthe poor. Federal law mandates public access to emergency servicesregardless of the ability to pay. Public spending accounts for between

45% and 56.1% of the US healthcare spending. Healthcare costs are thesingle most important factor influencing the federal government’s budgettrajectory. The reason for rising healthcare costs having majorimplications for government budgets is simple: almost half of healthcareis paid for by federal, state and local governments through Medicare (1),Medicaid (2), CHIP and other programmes. This fraction is expected togrow 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 areprojected 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 thepopulation. The remaining three-quarter is due to the fact that healthcarecosts are projected to increase faster than GDP. According to theCongressional Budget Office’s (CBO) projections, without any changes in federal law, total spending on healthcare will rise from 17% of theeconomy in 2009 to 25% in 2025 and almost 50% in 2082.

Indian BPOs see cash cow in Obama's health planWith close to 60 million more Americans set to come under public healthinsurance, if President Obama's proposed Bill is approved it will throw upincremental opportunities for Indian BPO players in the healthcare space.Companies are going to be forced to provide healthcare at even lowercosts through lower premiums. This is only going to increase their cost

pressures. This will, in turn, spur automation, outsourcing and offshoringto low cost locations. The US government is incentivising companies toautomate their health records and penalising companies that do notcomply. This whole electronic record business is like a Y2K opportunity.The need to integrate all records, payers, providers and others and bringthem on to a unified system so that the government knows what theissues are presents a huge opportunity.

Thus, the abovementioned expected ramp up in healthcare spendingoutlines strong volumes for companies like Firstsource in the long run.The company’s focus on healthcare will act as a strong revenue as well asprofitability driver as this segment enjoys highest revenue per employee

(Exhibit 15), attractive margins of +50% in spite of high onshore effort of72% (Exhibit 17). This presents headroom to shift work offshore andachieve further higher margins.

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 Source: Company, ICICIdirect.com Research

Note: (1) and (2) refer to annexure

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





opportunity will indeed grow at a more rapid pace translating intoincremental work for companies like Firstsource. Hence, we expect thehealthcare vertical for the company to easily grow at 8.9% CAGR overFY09-FY12E, which we believe is still conservative.

Telecom & media to catapult revenue growth

According to the Nasscom-Perspective 2020 study, the addressableopportunity for telecommunications for Indian BPO service providers isestimated to be US$20-25 billion. Technology has radically transformedthis industry and telecom service providers in advanced markets are inthe process of upgrading their networks to data intensive 3G wirelessnetworks. 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-endservice offering of sales & marketing, account setup & activation,customer service, billing/help desk support, receivables & collectionmanagements, etc. We expect this segment to grow at 21.0% CAGR overFY09-FY12E bolstering overall revenue growth for the company.

Exhibit 19: Trend in annual revenue growth for telecom & media for the company

0

100

200

300

400

500

600

700

800


R s c r o r e

Telecommunication & Media

FY09-FY12E CAGR:21%


Asia business Unit: A revenue driver

The Asia business unit, which is the domestic business, contributes about12% to the company’s revenue. Almost 90% of its business comes fromthe telecom & media vertical whereas the balance comes from the BFSIvertical. Thus, the growth prospect for this vertical is highly dependent onthe Indian telecom & media story. As highlighted below, the Indian marketis still under penetrated with overall wireless tele-density of merely 46%(Q3FY10-Exhibit 41). Though the metropolitan cities that contributemerely 6% of the total population are over penetrated the Tier II, Tier IIIcities and rural India i.e. B circle and C circle that constitutes 17% and44% of the population, respectively, are still under penetrated andpresent a huge opportunity for Indian telecom players (Exhibit 39, 40 and41). Thus, on the back of the Indian telecom industry’s subscribersexpected to grow at 28% CAGR over FY09-FY12E (Exhibit 40), we expectthe company’s Asia business unit to easily grow at 16.9% CAGR overFY09-FY12E.

The company’s 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 20: Trend in annual revenue growth for Asia business unit for the company

0

50

100

150

200

250

300

350


R s c r o r e

Asia business unit

FY09-FY12E CAGR:17%


Thus, we expect the company to register 11% CAGR over FY09-FY12E onthe back of strong revenue growth of 9%, 21% and 17% CAGR by itsmain verticals like healthcare, telecom & media and ABU, respectively.

Margin to head northwardsAs outlined above, telecom and media, ABU and healthcare will berevenue growth drivers for the company. Also, we expect the margin tomarch northwards on the back of the following facts:-

ABU will become EBIT neutral by H2FY11, scale up to 4% by FY12E asopposed 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 payerbusiness with the unemployment rate abating and BFSI collectionbusiness returning to growth, SGA expenses will scale down,

Also, the seat fill factor will further improve with improving businessvolumes helping to scale down other operating expenses. Apart fromthis, facilities consolidation like movement of process to low costPhilippines from Argentina and expansion in Tier II and III cities willprovide cushion to margins.

Exhibit 21: Trend in seat fill factor

0

5000

10000

15000

20000

25000

FY07 FY08 FY09 Q1FY10 Q2FY10 Q3FY10

N o s

64

66

68

70

72

74

76

78

80

82

%

Seats Seat f il l factor


Thus, we expect the EBITDA as well as EBIT margin to scale up each by190 bps standing tall at 16.1% and 11.6%, respectively, by FY12E.

On the back of strong subscriber growth expected in

the domestic market of over 28% CAGR over FY09-

FY12E, we expect the Asia business unit to easily

grow at 17% CAGR over FY09-FY12E

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





Exhibit 22: Trend in operating margins

10.2

12.8

14.4 14.614.0 14.2

15.116.1

4.5

7.6

9.7 10.0 9.6 9.710.5 11.6

0.0

6.0

12.0

18.0

Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 FY10E FY11E FY12E

%

EBITDA EBIT


Marquee clientele with diversified base:

Exhibit 23: Client pyramid

Healthcare Telecom & Media BFSI ABU

Five of the top 10 health

insurance/managed care

companies in the US and

over 800 hospitals in the

US out of 5000.

Two of the top 3 UK mobile

companies, two of the top

four broadband companies

in the UK, largest cable &

satell ite TC operator in UK

and Australia and two of the

top 10 US telecomcompanies

Seven of the top 10 general

purpose credit card issuers

in the US, UK’s largest retail

bank and mortgage lender

and a top 3 UK motor /auto

insurer

Three of the top

5 mobile

companies in

India, India’s

leading private

life insurer

The company has 33 global 2000 companies as clients include 17 Fortune500 and eight FTSE 100 companies. Its clientele in each of its businessunit includes marquee names like Bharti Airtel, Idea and Vodafone Essarin the domestic market and Barclays as well as Unirush for BFSI services.

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 EBITneutral, 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





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(%) 21.0

FY12E PATexcls interest cost)(Rs crore) 210.1

Weighted average number of shares(crore) 45.9

EPS for FY12E EPS(Rs) 4.6

PAT for FY13E(Rs crore) 241.6


Average number of shares(crore) 51.9

% YoY growth 1.7

Scenario II(Reset of conversion price by August 2010)

Estimated conversion price(Rs) 29.0

Number of shares to be issued (crore) 28.7Dilution risk(%) 66.9

FY10E EPS(RS) 3.1

Number of shares outstanding in FY11 71.6

FY11E EPS 2.2

% YoY growth (29.6)

Scenario II(Payback by internal accrual and partial refinancing))

Internal accrual(USD million) 125

Obligation (with accrued interest)(USD mn) 259

Portion to be refinanced(USD mn) 134

Cost of refinanced debt 7%

Interest expense to pass through in Q4FY12(USD mn) 2.3

FY12E PAT 190.8EPS for FY12E EPS(Rs) 4.4

EBIT for FY13E @ growth of 15% 321.8

Interest expense due to FCCB 41.2

Interest expense due to ECB 23.4

PBT 257.2

Dilution risk(%) -

FY13E PAT@ tax rate of 25% 192.9


% YoY growth 1.1

Scenario III(Repayment via internal accural and partial QIP)

Issue price estimated 38

Issue size needed 602Number of share of Rs10 face value to be issued 15.8

FY12E PAT (excls interest cost)(Rs crore) 210.5

Weighted average number of shares(crore) 48.2


FY13E PAT @15% growth 242.1

Average number of shares outstanding 58.7


% YoY growth (5.7)

Dilution risk(%) 36.9


The company has US$212 million zero coupon FCCBs outstanding as onDecember 31, 2009, which will mature by December 2012. Theconversion price is at Rs 92, almost 3x CMP. Thus, this amount can beconsidered as debt resulting in gearing of 1.8x, which is very high as





opposed to other BPO companies. This will come in as a huge liabilityincidence in FY12 and will stretch the company’s 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 byinternal accrual and the rest via refinancing with no dilution risk andEPS growth of 1.1% in FY13E

Scenario III assumes the QIP will be done over the next 15 monthsand issue price is taken close to our target price of Rs 38. This willresult 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 week’saverage will prove to be the most lethal with dilution risk of 67% andearnings de-growth of 30%

We have assumed Scenario II for our valuations. In case the companyadopts 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 ratesThe company has abnormal attrition rates of 75% (average for YTDFY10)in its domestic business. This is because people in Tier II and Tier III citiesare highly price sensitive. Once demand for business services becomesrobust again, these attrition rates will escalate making peoplemanagement difficult and leading to unnecessary cost run-up related totraining, general & administration expenses.

Exhibit 25: 180 days annualised attrition rates (delivery centre wise)

-

10

20

30

40

50

60

70

80

90

100

Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10

%

Domestic Offshore(India,Argentina & Phillippines) Onshore(US & UK)


Cross-currency volatilityThe company has 60% of its revenue coming in from the US and Canadaand 27% coming in from Europe. Thus, any steep appreciation of the US$against the British pound and euro as well as INR appreciation against theUS dollar will hurt the overall rupee realisation posing risk to our estimate.

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%





Financials

Niche vertical focus to support moderate revenue growth

The company’s end-to-end services offering in telecom & media andstrong capabilities in the healthcare vertical will drive growth, going forward. The company has grown at 45% CAGR over FY07-FY09 whereasthe Indian BPO industry grew at 24% CAGR over the same period. Thecompany’s revenue growth settled down to the same growth level as theindustry 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) and11% CAGR (rupee terms) over the same period.

Exhibit 26: Revenue growth

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0


R s c r o r e

0

10

20

30

40

50

60

%

Revenues YoY GROWTH

FY07-FY09 CAGR:45%

FY09-FY12E CAGR:11%


Operating margin to surge

The company heavily invested in its ABU business since H2FY09 to tap

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 company’s revenue to grow over

FY09-FY12E at 11% CAGR

Exhibit 27: Trend in margins

19.9

18.0

13.214.2

15.116.1

7.99.7 10.5

11.6

6.3 6.7 7.5 7.9

11.412.2

10.011.6

0.0

5.0

10.0

15.0

20.0

25.0


( % )

EBITDA EBIT PAT


* Note PAT margins for FY09 are computed excluding MTM loss on FCCB

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 theend of FY12E





the burgeoning business service opportunity in telecom. This was on theback of the huge penetration opportunity left for Indian telecom playersas well as with the expectation of the launch of advanced technologieslike 3G and WiMax. This business, which is still not EBIT neutral, isexpected to turn around in H2FY11 and will start adding to profitability. Inaddition, with improving macroeconomic conditions, the surge in

business volumes will help to increase the seat fill factor as well as cutback on SGA as investments in healthcare and T&M automatically startyielding.

Thus, the EBITDA and EBIT are expected to accelerate by 19%and 27%CAGR, respectively, ahead of revenue growth expectation of 11% CAGRover FY09-FY12E. Thus, the above expected facts will provide a cushionto the EBITDA margin. They will rebound to reach 16.1% by FY12.Therefore, the net profitability is expected to surge at 20% CAGR overFY10-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 areexpected to bounce back to double digits i.e. 10.3% by FY12E.

Exhibit 28: Trend in return ratios

18.0

7.98.8 9.4

10.3

7.4

5.0

6.57.1

10.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY08 FY09* FY10E FY11E FY12E

%

RONW* ROCE


* RONW for FY09 doesn’t include MTM loss on FCCB

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





Valuations

With the global macro environment returning to the normal course andthe domestic telecom & media market gearing up for high growth phaseagain, 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 anddomestic peers like Hinduja Global Solution for relative valuations. On abroad basis, BPO companies are expected to have growth of 10-15% inFY12 with EBITDA margin of 15% plus in FY12. The company is trading ata heavy discount as compared to global peers on each of the followingmultiple basis i.e. PE(x), EV/EBITDA, price/sales (P/S).

Exhibit 29: Peer comparison

Firstsource* HGSL WNS Genpact EXL Services

Currency INR crore INR crore USD mn USD mn USD mn

Revenues

FY2009 1749.7 797.6 385.7 1119.4 178.8

% YoY growth 34.7 25.2 31.3 7.5 17.6

FY2010E 1953.0 918.4 394.8 1295.0 219.9

% YoY growth 11.6 15.1 2.4 15.7 23.0

FY2011E 2085.4 1094.1 434.2 1503.0 257.3

% YoY growth 6.8 19.1 10.0 16.1 17.0

FY2012E 2405.4 NA 489.0 1737.8 NA

% YoY growth 15.3 NA 12.6 15.6 NA

EBITDA margins(%)

FY2009 13.2 16.7 18.2 21.5 15.8

FY2010E 14.2 22.2 21.3 21.1 16.1

FY2011E 15.1 21.0 20.1 21.1 16.6

FY2012E 16.1 NA 20.7 20.5 NA

EPS(Adjusted) INR INR USD USD USD

FY2009* 2.5 45.6 1.0 0.8 0.4

FY2010E 3.1 63.9 1.2 0.9 0.6

FY2011E 3.7 71.1 1.4 0.9 0.8

FY2012E 4.5 NA 1.7 1.2 NA

BVPS INR INR USD USD USD

FY2009 32.2 477.3 5.3 4.4 6.3

FY2010E 35.3 511.6 4.4 5.7 7.2

FY2011E 38.9 573.7 5.1 6.6 8.2

FY2012E 43.4 NA 6.6 7.7 NA

RONW(%)

FY2009* 7.9 9.8 10.9 15.0 8.5

FY2010E 8.8 14.3 12.1 14.0 10.2

FY2011E 9.4 15.1 16.9 14.9 11.0

FY2012E 10.6 NA 16.1 14.9 NA

Source: Bloomberg, ICICIdirect.com Research

Note: HGSL refers to Hindustan Global Solutions Ltd

* refers to calculations using PAT excluding MTM loss on FCCB





Exhibit 30: Relative Valuations

FY2009* FY2010E FY2011E FY2012E

P/E

Firstsource* 11.5 9.4 8.0 6.6

HGSL 9.5 6.8 6.1 NA

WNS 13.9 12.3 10.0 8.3

Genpact 21.0 18.6 16.7 13.6

EXL Services 41.7 27.3 23.1 NA

Average for domestic BPO players 10.5 8.1 7.0 6.6

Average for Global BPO players 25.6 19.4 16.6 10.9

Discount(%) 59.0 58.4 57.8 40.0

EV/EBITDA

Firstsource 10.6 8.8 7.8 6.3

HGSL 2.3 1.5 1.3 NA

WNS 10.2 8.6 8.2 7.1

Genpact 12.9 11.4 9.8 8.7




Discount(%) 47.3 49.7 49.3 19.8

P/Sales

Firstsource 0.7 0.6 0.6 0.5

HGSL 1.1 1.0 0.8 NA

WNS 1.6 1.6 1.4 1.3

Genpact 3.1 2.6 2.3 2.0




Discount(%) 63.5 63.0 62.7 67.9

P/BVPS

Firstsource 0.9 0.8 0.8 0.7

HGSL 0.9 0.8 0.8 NA

WNS 2.7 3.3 2.9 2.2

Genpact 3.6 2.8 2.4 2.1




Discount(%) 70.1 70.4 69.4 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 arrivedat the average target price for the company at Rs 38 per share. Thisconforms to our discounted cash flow valuation method, which also givesus a target price of Rs 38 per share. Hence, we are initiating coverage onFirstsource Solution with a target price of Rs 38 per share and STRONGBUY rating.

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 FY10-

FY12E, lower than global peers. We are valuing it attarget 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


players on an average on EV/EBITDA over FY09-

FY11. 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


players on an average on P/E over FY09-FY11.The

company’s 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





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) 4.4Target Price (Rs) 38.9

EV/EBITDA



EBITDA(Rs crore) 388

Target EV(Rs crore) 2755

Cash & Cash equivalent(Rs crore) 62

Debt(Rs crore) 838.67

Target Mcap(Rs crore) 1979

Target price(Rs) 38.1

P/Sales


Discount to global multiple 60


Sales per share(Rs) 56

Target Price(Rs) 36.4

Average Target Price 37.8 Source: Company, ICICIdirect.com Research

DCF-based valuation: Rs 38 per share

Exhibit 32: DCF based valuations

Rs crore FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E

EBITDA 278 314 388 464 555 638 728 815 888 959

Less: Tax (25) (37) (57) (68) (82) (94) (107) (120) (131) (141)

Add:(Inc)/Dec in Net CA (188) (135) 129 (119) (123) (140) (158) (190) (132) (104)

Operating Cash Flows 65 142 460 277 351 404 462 505 626 714

Add:(Inc)/Dec in Net FA (57) (46) (75) (59) (42) (43) (48) (49) (43) (60)

Free Cash Flows(FCF) 8 96 385 218 309 361 414 456 583 654

Discounting Factor 1.0 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4

PV of FCF 8 86 311 158 202 212 218 216 249 251

Total Primary value of FCF 1,911 - - - - - - - - -

Terminal value of FCF 3,010

DCF Valuation Rs crore Assumptions

PV of firm 4,920 WACC 11.2%

Less: Current Debt 1,395 Revenue CAGR 14.7%

Total present value of the Equity 3,526 (FY10-FY19E)

Add:Cash & Cash equivalent 225 Terminal Growth 3.5%

Add/(Less):Goodwill (2,140) Tax rate 23.0%

Value of Equity 1,611 EBITDA(%) 17%

Number of equity shares 43

Value per equity share in Rs. 38






Table and Ratios

Exhibit 33: Profit & loss statement

(Rs Crore)

(Year-end March) FY08 FY09 FY10E FY11E FY12E

Total Sales 1,298.7 1,749.7 1,953.0 2,085.4 2,405.4

% Growth 56.3 34.7 11.6 6.8 15.3

Operating Expenses 352.8 497.1 491.7 500.3 553.2

% of Sales 27.2 28.4 25.2 24.0 23.0

Personnel Expenses 712.0 1,021.1 1,183.0 1,270.8 1,464.1

% of Sales 54.8 58.4 60.6 60.9 60.9

Total Expenditure 1,064.8 1,518.3 1,674.7 1,771.0 2,017.4

% Growth 42.6 10.3 5.8 13.9

Operating Profit 233.9 231.4 278.3 314.4 388.0

% Growth 41.2 (1.1) 20.2 13.0 23.4

Other Income 34.9 29.8 22.0 10.9 19.6

Depreciation 86.1 93.6 89.7 96.0 108.2 EBIT 147.8 137.9 188.6 218.3 279.8

% Growth 45.6 (6.7) 36.8 15.8 28.1

Interest 38.1 116.7 51.8 34.6 51.1

Profit before Tax 144.6 51.0 158.8 194.6 248.4

% Growth (64.7) 211.3 22.6 27.6

Taxation 12.7 19.9 25.4 37.0 57.1

Net Profit before MI 130.5 31.1 133.4 157.7 191.2

Minority Interest (1.0) 0.1 0.4 0.4 0.4

Net Profit(Incl FCCB MTM) 131.5 31.0 133.0 157.3 190.8

Net Profit(Excl FCCB MTM) 131.5 108.8 133.0 157.3 190.8 Source: Company, ICICIdirect.com Research

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 48and 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

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





Exhibit 34: Balance sheet

(Rs Crore)


Liabilities

Equity Share Capital 427.3 428.1 429.1 429.1 429.1

Reserves & Surplus 312.7 951.2 1,084.3 1,241.5 1,432.4

Secured Loans 59.7 185.6 292.7 292.7 292.7 Unsecured Loans 1,195.5 1,209.0 1,096.4 1,096.4 546.0

Current Liabilities & Provisions 605.2 263.9 253.7 255.9 282.4

Minority Interest 3.6 5.5 5.2 5.2 5.2

Total Liabilities 2,604.0 3,043.3 3,161.4 3,320.8 2,987.8

Assets

Gross Block 534.0 634.8 691.9 737.9 813.0

Less Accumulated Depreciation 320.4 415.8 505.4 601.5 709.7

Net Block 213.6 219.1 186.5 136.5 103.3

Capital WIP 8.9 7.0 9.0 9.0 5.0

Total Fixed Assets 222.5 226.1 195.5 145.5 108.3

Goodwill 1,888.0 2,287.5 2,139.7 2,133.0 2,133.0

Investments 22.1 1.8 125.0 203.6 10.0

Loans & Advances 105.1 118.7 230.0 276.0 278.8

Cash 102.5 96.7 100.0 175.6 52.3

Sundry Debtors 205.4 237.9 292.2 302.8 329.5

Unbilled revenue 40.0 60.5 69.1 74.3 65.9

Total Current Assets 452.9 513.8 691.2 828.7 726.5

Deferred Tax Assest,net 18.4 14.1 10.0 10.0 10.0

Total Asset 2,604.0 3,043.2 3,161.4 3,320.8 2,987.8 Source: Company, ICICIdirect.com Research

Exhibit 35: Cash flow statement

(Rs Crore)


Profit after Tax 132.9 31.0 133.0 157.3 202.9

Depreciation 86.1 93.6 89.7 96.0 108.2

(Inc)/Dec in Deferred Tax assest (18.4) 4.4 4.1 - -

Cash Flow before WC Changes 200.6 129.0 226.8 253.3 311.2

Net Increase in Current Liabilities 468.4 (341.3) (10.2) 2.2 28.9

Net Increase in Current Assets (39.7) (53.0) (62.8) (15.9) (51.3)

Cash Flow after WC Changes 428.8 (394.3) (73.0) (13.7) (22.4)

(Inc)/Dec in goodwill (1,346.1) (399.5) 147.8 6.7 - (Inc)/Dec in loans and advs (43.9) (13.7) (111.3) (46.0) (27.6)

Purchase of Fixed Assets (128.4) (97.1) (59.1) (46.0) (75.0)

Increase / (Decrease) in Investments 93.1 20.3 (123.2) (78.6) (121.8)

Cash Flow from Investing Activities (1,425.3) (490.0) (145.8) (164.0) (224.4)

Inc / (Dec) in Loan Funds 1,057.6 139.4 (5.5) - -

Inc / (Dec) in Equity Capital (326.6) 639.3 134.1 157.3 202.9

Addition to reserves on amalgamation (133.0) (31.0) (133.0) (157.3) (202.9)

Dividends - - - - -

Cash Flow from Financing Activit ies 598.0 747.7 (4.5) 0.0 (0.0)

Op bal Cash & Cash equivalents 301.0 102.5 96.7 100.0 175.6

Closing Cash/ Cash Equivalent 102.5 96.7 100.0 175.6 240.1 Source: Company, ICICIdirect.com Research

The capital employed will scale down in FY12E as

the company will repay its FCCBs via internal

accrual and partial refinancing





Exhibit 36: Ratios


Per Share Data (Rs)

EPS 3.1 0.7 3.1 3.7 4.5

Cash EPS 5.1 2.9 5.2 5.9 7.0

Book Value 17.3 32.2 35.3 38.9 43.4 Operating Profit Per Share 5.5 5.4 6.5 7.3 9.0

Operating Ratios

Operating Margin (%) 18.0 13.2 14.2 15.1 16.1

Net Profit Margin (%) 9.9 1.7 6.7 7.5 7.9

Return Ratios

RoE (%) 18.0 2.2 8.8 9.4 10.3

RoCE (%) 7.4 5.0 6.5 7.1 10.3

Valuation Ratios

EV/EBITDA 10.5 10.6 8.8 7.8 6.3

PE 9.4 11.5 9.4 8.0 6.6 EV/Sales 1.9 1.4 1.3 1.2 1.0

Sales to Equity 1.8 1.3 1.3 1.2 1.3

Market Cap to sales 1.0 0.7 0.6 0.6 0.5

Price to Book Value 1.7 0.9 0.8 0.8 0.7

Turnover Ratios

Fixed Assets Turnover Ratio 5.8 7.7 10.0 14.3 22.2

Debtors Turnover Ratio 6.3 7.4 6.7 6.9 7.3

Creditors Turnover Ratio 7.4 7.0 7.9 8.1 8.1

Cash to Absolute Liabilities 0.2 0.4 0.4 0.7 0.2

Solvency Ratios

Debt/Equity 1.7 1.0 0.9 0.8 0.5 Current Ratio 0.7 1.9 2.7 3.2 2.6

Quick Ratio 0.6 1.5 2.3 3.0 1.6


Exhibit 37: DuPont analysis

FY08 FY09E FY10E FY11E FY12E

PAT / PBT 91.0 60.8 83.8 80.8 76.8

PBT / EBIT 97.8 37.0 84.2 89.1 88.8

EBIT / Sales 11.4 7.9 9.7 10.5 11.6

Sales / Assets 5.8 7.7 10.0 14.3 22.2

Assets / Equity 0.3 0.2 0.1 0.1 0.1RoE 17.8 2.2 8.8 9.4 10.3






Global T & M marketThe key industry trends being witnessed in the company’s targettelecommunications 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 andefficiencies through reengineering initiatives and cost reductions. Hence,

outsourcing/right-shoring is finding increased interest.Broadband/high speed internet - New customer additions now pickingup again and roll out of super fast broadband network presents anincremental opportunity for a spurt in volumes for inbound sales.Fixed/wire line – The emerging trend of UK wireless operators crossselling fixed line to their internet service providers (ISP) clients willincrease the ARPU. Some opportunities will support cost cuttinginitiatives for enterprise clients.DTH/Pay TV — Under the current recessionary environment, the segmentis gaining importance as customers are cutting back on going out andprefer to stay at home resulting in higher service usage. There is also ademand for bundled packages and triple play. Thus, business volumes

are now showing a positive trend. Development of IPTV offerings andHDTV offerings also present an opportunity for business services.

Domestic telecom market

Exhibit 39: Population distribution circle wise (Q3FY10)

6%

33%

44%

17%

Metro Total A circle B circle C circle

Source: TRAI, ICICIdirect.com Research

As highlighted below each of these circles are expected to have strong

subscriber growth, going forward, with B and C circles outlined to grow ata scorching pace of 31% and 42% CAGR over FY09-FY12E (Exhibit 24).This will help the overall wireless teledensity to reach 68% by FY12translating into burgeoning volumes for business services providers.

Exhibit 40: Subscriber Information (Circle wise)

Subscriber (crore) FY09 FY10 FY11 FY12 CAGR

Metro 6.2 8.2 9.4 10.1 17.8%A Circle 13.5 19.3 23.1 25.7 23.8%

B Circle 14.4 22.2 28.0 32.7 31.4%

C Circle 4.5 7.8 10.5 12.9 42.3%

India 38.6 57.5 70.9 81.3 28.2% Source: TRAI, ICICIdirect.com Research

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

The subscriber base in B and C circle will grow at a

scorching pace of 31% and 42% CAGR over FY09-

FY1E





Exhibit 41: Teledensity circle wise

73

95 99105

114 118126 129

2334 37 40

46 4960

68

-

20

40

60

80

100

120

140

FY08 FY09 Q1FY10 Q2FY10 Q3FY10 FY10E FY11E FY12E

%

Metro Total A circle B circle C circle India total

Source: TRAI, ICICIdirect.com Research

MedicareMedicare is a social insurance programme administered by the USgovernment, providing health insurance coverage to people aged 65 andover or who meet other special criteria. The programme also fundsresidency training programmes for the vast majority of physicians in theUS.

MedicaidMedicaid is the US health programme for eligible individuals and familieswith low incomes and resources. It is a means tested programme that is

jointly funded by the states and federal governments and is managed bythe states. Among groups of people served by Medicaid are certaineligible US citizens and resident aliens, including low-income adults andtheir children and people with certain disabilities. Poverty alone does notnecessarily qualify an individual for Medicaid. It is estimated thatapproximately 60% of poor Americans are not covered by Medicaid.Medicaid is the largest source of funding for medical and health-relatedservices for people with limited income in the US. On account of theaging Baby Boomer population, the fastest growing aspect of Medicaid isnursing home coverage.

Services offered to healthcare payers

Teledensity in B and C circle is expected to double

over FY09-FY12E presenting huge volume

opportunity for business services





Services offered to healthcare providers

Services offered to telecom & media

Services offered to BFSI




RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assignsratings to its stocks according to their notional target price vs. current market price and then categorises themas Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and thenotional 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 [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,7th Floor, Akruti Centre Point,MIDC Main Road, Marol NakaAndheri (East)Mumbai – 400 093

[email protected]

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