Reasons for Firstsource's recent outperformance

Company plans to reduce debt, achieve higher cost efficiencies but sustainable financial performance remains key

FY14 will be a year of consolidation for Mumbai-based Business Processing and Outsourcing (BPO) company Firstsource. Its new parent- CESC- has streamlined the key focus areas for a successful turnaround of the company. The BPO will bid adieu to non-profitable clients. It aims to eliminate debt (net debt of $167 million) over the next four years and improve cost efficiences (by cost optmisation and increasing the revenue per employee).

Sanjiv Goenka, Chairman, Firstsource Solution, says, "Fundamentally, this year will be devoted to consolidation of topline. There are some accounts which are not profitable. There will be rationalisation of such customers. There will be a focus on costs and margins."

The company plans to focus on profitable growth going forward. However, as it embarks upon client consolidation, revenues for this fiscal will be hit leading to a flattish topline growth in FY14. Management, though, remains fairly confident of showing some upticks in revenues in FY15.

In addition to these organic measures, Firstsource is also exploring inorganic opportunities in the data analytics space. Though these buyouts will be smaller in size, they will add to the BPO's offerings considerably.

While it is focussing on the right things, the company's ability to ramp up revenues and profits will be tested given the weakening macro. The stock rose 3% on Tuesday as against Sensex's fall of 2.34%. However, one has to watch out for some sustainable traction in the company's financial performance before investing in this stock.

For the June 2013 quarter, Firstsource's sales grew by 0.9% sequentially to Rs 719 crore while the net profit grew 2.1% sequentially to Rs 41 crore. Its EBITDA margin though contracted 50 basis points sequentially to 11.2% thanks to the wage hikes impacted by the company. However, the company plans to scale up its EBITDA margin to 12-12.5% levels in FY14 as a result of its focus on improving profitability.