Stock Review: FIRST Source Solutions

 

At Rs 26, Stock Trades At Nearly Nine Times Its Earnings For The Trailing 12 Months

 

FIRST Source Solutions (FSL), a Mumbai-headquartered business process outsourcing (BPO) company, has underperformed on the bourses over the past six months. Its stock fell 15% as against a 15% gain in the benchmark Sensex.

   The stock's lacklustre show can be attributed to the depressed operational environment for FSL. However, the company is expected to see some recovery in the second half of FY11. This may provide some support to its stock in the near term.

   The company continues to have a subdued performance for the quarter ended June 2010. FSL's consolidated sales fell sequentially 3% to Rs 490 crore as against the previous quarter. This was mainly on account of the seasonal drop in the collections business, which forms nearly half of the banking and financial services segment.

   Despite lower volumes, the company managed to maintain its operating margin at previous quarter's level of nearly 13.9% on account of improved operating efficiencies. The company is expected to see a gradual turnaround in its healthcare and telecom verticals, which together contribute two-thirds to the revenue. It has expanded the number of seats by 950 during the June quarter. The company expects to use a majority of this additional capacity to cater to the demand from the telecom segment.

   A pick-up in the US government's healthcare expenditure is anticipated, going ahead to insure more citizens. This augurs well for the healthcare domain of FSL. The US healthcare reforms are likely to boost the receivables management segment of its healthcare division. The company has also witnessed new assignments from the existing clients across its major verticals.

   At the current market price of Rs 26, the stock trades at nearly nine times its earnings for the trailing 12 months. Given the anticipation of growth in volumes in its major business segments, FSL is expected to fare better in coming quarters.