Firstsource: A diversified portfolio

The Firstsource Solutions stock has been having a bit of a rollercoaster ride thanks to talk about some promoters selling out. After surging by 22.6 per cent on Tuesday, the stock fell by 8.4 per cent to Rs 44.30 on Wednesday and further on Thursday.

The Rs 1,240 crore business process outsourcing (BPO) firm has been going through a rough patch. In the June 2008 quarter, the topline grew by just 7 per cent sequentially to Rs 401 crore. That’s because the collection business — relating to tax payments in the US — didn’t do as well as expected.

Moreover, an FCCB issue of $275 million, made to fund its Medi Assist acquisition, resulted in a net loss of Rs 40 crore, in the wake of adverse currency movements. As the rupee weakened in the past two quarters, Firstsource had to show the non-operational losses in its profit and loss statement account. If the rupee strengthens beyond the Rs 39.50-level, the losses will be reversed. The FCCB is due to be converted in 2012 at a conversion price of Rs 92.30.

Analysts believe that the price paid for acquiring MediAssist,at 3.3 times trailing revenues, was high. However, Firstsource has benefited from a diversified product portfolio and besides, MediAssist has a higher operating profit margin than Firstsource. With a strong presence in verticals such as healthcare, banking and financial services and telecom, the company is well-diversified and should be in a position to tap further growth in the BPO space.

Indian BPOs have so far tapped just about 8 per cent of the addressable market and demand for offshore services should remain strong, say industry watchers. NASSCOM predicts that the BPO business will grow above 40 per cent compounded annually growth over the next three years. At the current price of Rs 42.25, the Firstsource stock trades at 11.4 times its estimated FY09 earnings and is a tad expensive at this stage.