Stock Pick From The Computers Sector

HERE IS WHY:

• Around 80-85 per cent of FSOL’s revenues come from North America and UK markets.
• The healthcare vertical is expected to act as a major growth driver for FSOL over the next three years. 
• As most of the company’s revenues come from the US and UK it will provide a natural hedge against its foreign currency debt.

The BPO space in IT industry which does not drag much attention of investors as a long-term value creator, there is one company in the Indian listed space, which has a potential of creating good value for its stakeholders. Firstsource Solutions (FSOL), a BPO company which provides customer management, collections management, data processing and business transformation services globally. FSOL clocked revenue of USD 129 million in Q3FY14. Around 80-85 per cent of FSOL’s revenues come from North America and UK markets with 99 per cent coming from Healthcare, Telecom & Media and BFSI verticals. 

In the recent past, FSOL had been facing various issues which seem to be on the way of being resolved, as the company has shown a continuous growth in its revenue in past four quarters. Interestingly, its net profit also showed consistent growth quarter-on-quarter (QoQ) during the same period. The net profit of company stood at USD 8 billion in Q3FY14, registering a growth of 8 per cent on sequential basis. Additionally, the growth can also be seen with the sequential expansion of 32 basis points in operating profit margins which stood at 11.6 per cent for Q3FY14. FSOL's management has an aim to reach 15 per cent of EBITDA margins by FY15. 

Apart from this, FSOL's interest charges have been stabilized during the last four quarters, coupled with the reduction in long-term debt burden on its book. The long-term debt came down to Rs 838 crore (as of 30th September 2013) from Rs 850 crore as of 31st March 2013. Despite of having a higher debt, promoters of the company have not pledged its holding. The growth in the company showed during past few quarters also drew the interests from FIIs, taking their stake in the company to 3.06 per cent as of 31st December 2013 from just 0.94 per cent as on 31st December, 2012.

On rupee front, considering the fact that FSOL's foreign currency denominated debt brings about the question of being hurt by the volatility of the rupee. However, as most of the company's revenues come from the US and UK it will provide a natural hedge against its foreign currency debt, thus offsetting the impact of cross-currency fluctuations. On the other hand, we are of the opinion that rupee will remain weaker and not to appreciate over next couple of quarters, translating good realisation from its foreign currency denomination revenue. 

Also the healthcare vertical is expected to act as a major growth driver for FSOL over the next three years, with the implementation of ‘Obamacare’ (The Patient Protection and Affordable Care Act) in the US. Moreover, the telecom and BFSI segments in the UK are also expected to provide substantial growth traction for the company. The immense growth potential of FSOL and cheaper valuation of its stock, which is trading at a PE ratio of 9x its TTM EPS of Rs 2.65, make this company as a great investment avenue for a long term horizon.