Recommendations from Computers - Software Medium & Small

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

GETS A FIRST-MOVER ADVANTAGE

FIRSTSOURCE SOLUTIONS

HERE IS WHY

☛Diversified revenue profile
☛Improving operating profitability
☛Good growth prospects

Firstsource provides BPO services across three verticals: telecom and media, healthcare and BFSI. The company has a global delivery model with 18,712 employees and 37 delivery centres across the US, the Philippines, India, the UK, and Sri Lanka. Firstsource has established itself as a prominent player in the BPO space. The company benefits from its scale of operations and revenue diversity across verticals. It has created a strong market position through organic growth, supplemented by acquisitions. Its revenue profile is diversified among the three verticals – BFSI (36 per cent), healthcare (34 per cent) and telecom and media (28 per cent).

Recently, the state government of Karnataka has asked Firstsource and the BPO arm of Infosys to help set up a call centre that can be used to trace people with suspected Covid-19 infections and ensure that quarantine rules are followed.

It is quite likely that other states may also rope in some technology support on such lines. Even in the US, Firstsource has seen a rapid influx of calls for health insurance queries due to the Covid-19 epidemic. Being an established BPO player in the healthcare segment will help Firstsource in the current quarter in posting decent revenue.

Increasing proportion of digital businesses and outcome-based assignments will enable the company to post sustained growth in revenues and profitability over the medium term. The onshore delivery model wherein majority of manpower is recruited and deployed in client locations safeguards it from protectionist measures of countries like the US and from currency fluctuations. The company's operating profitability has consistently improved over the last five years; its operating profitability stood at 14.0 per cent in fiscal 2019 compared to 13.2 per cent in fiscal 2018. This is on account of focus on profitable growth through reduction in business from low margin clients (both domestic and overseas), increasing use of digital technologies, growth in collection services and improving performance of acquired businesses. Additionally, over the last few years, Firstsource has taken initiatives for rationalising its costs through alignment of its delivery centres which contributed towards improvement in the operating profit margin.

On a consolidated basis, the gross sales have increased by 7.43 per cent to Rs 10,445.84 crore in the December quarter of FY20 from Rs 9,723.13 crore in the same quarter last year. EBITDA (excluding other income) showed an increase of 22.43 per cent to Rs 1,666.35 crore in the December quarter of FY20 from Rs 1,361.05 crore in the same quarter last year. PAT for the recent quarter stood at Rs 895.42 crore as against Rs 981.27 crore in the same quarter last year, showing a decrease of 8.75 per cent. The decrease in PAT was predominantly on account of increased depreciation cost. The company had a healthy return on capital employed (RoCE) of around 14 per cent last year. By virtue of these factors, we recommend our reader-investors to BUY this stock.