1. Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.
AnandRathi Research India Equities
Technology
Company Update
India I Equities
Mohit Jain
Research Analyst
+9122 6626 6531
mohitjain@rathi.com
Shobit Singhal
Research Associate
+9122 6626 6511
shobitsinghal@rathi.com
Key financials (YE Mar) FY15 FY16 FY17 FY18e FY19e
Sales (` m) 30,034 31,747 34,569 33,564 35,156
Net profit (` m) 2,345 2,650 2,800 2,671 2,757
EPS (`) 3.3 3.8 4.0 3.9 4.0
Growth (%) 19.0 13.1 5.6 -2.6 3.2
PE (x) 10.3 9.1 8.6 8.9 8.6
PBV (x) 1.2 1.0 1.2 1.0 0.9
RoE (%) 11.2 11.7 12.6 12.4 11.3
RoCE (%) 8.2 7.8 7.3 7.2 7.9
Dividend yield (%) - - - - -
Net debt/equity (x) 0.4 0.3 0.4 0.2 0.1
Source: Company, AnandRathi Research
`
Rating: Hold
Target Price: `38
Share Price: `35
Key data FSOL IN / FISO.BO
52-week high / low `49bn / `30
Sensex / Nifty 32014 / 9979
3-m average volume $1.8m
Market cap `24bn / $369.7m
Shares outstanding 682m
Shareholding pattern (%) Jun'17 Mar'17 Sep'16
Promoters 54.9 54.9 55.4
- of which, Pledged - - -
Free float 45.2 45.1 44.7
- Foreign institutions 8.6 9.2 9.3
- Domestic institutions 6.4 6.8 6.0
- Public 30.2 29.1 29.3
Change in Estimates Target Reco 
8 August 2017
Firstsource Solutions
Growth sluggish; retaining a Hold
With revenue at $132m (up 1.8% q/q, 1% y/y), incl. $6m from the sky
deal (two-month further consolidation in Q1), Firstsource struggled
organically (dollar revenue down 2.8% q/q, 3.8% y/y). This includes
adverse currency movements (UK revenue: 41%, £-$ down 3.1% q/q).
Margin performance at 8.6% was commendable (up 42bps q/q, down
290bps y/y), supported by reduced headcount (by 858 or 3.3%). We cut
our FY18e/FY19e ~8%/ 5.5%, factoring in currency movements and
the domestic business sale. Our new target is `38 (9x FY19e EPS).
Slow growth and limited opportunities to improve margins. FSOL is
now in a slow-growth phase with many verticals (BFSI: 27% of revenue,
telecoms: 37%) reporting anaemic organic growth. The third vertical
Healthcare (36% of revenue) is growing in mid-single digits but faces
uncertainty (~1% of revenue) due to evolving regulations. Overall, FY18 may
see weak dollar growth (1% y/y) with a 3.7% impact due to the sale of the
domestic business, and another 1.3% impact from GBP movement. Given
long-term hedging, other income will be high in FY18, protecting profits.
Domestic business sale to pull up margins. FSOL sold its domestic BPM
business (~6% of revenue) including transfer of 4,500 employees for an
undisclosed sum. We have factored this into our estimates (proceeds
estimated at $9m @ 0.35x revenue) and expect it to end FY18 with a 30bp
higher EBITDA margin, excl. other income. Management believes that over
FY17-19, a 70bp margin expansion is possible due to the sale. In reported
terms at the company level, it has guided to 50bp margin expansion in FY18.
Valuations. Factoring in the sale of domestic business and currency
movements, we lower our FY18e/19e by 8%/5%. In Q1 FY18, other income
constituted 40% of PBT, uncomfortably high. We slightly lower our target to
`38 (9x FY19), and maintain our Hold call. Risks: M&A-driven growth,
automation.
Relative price performance
Source: Bloomberg
FSOL
Sensex
30
35
40
45
50
55
60
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Estimates revision (%) FY18e FY19e
Sales ($) (3.5) (4.5)
EBITDA (9.8) (3.8)
PAT (8.1) (5.5)

2. 8 August 2017 Firstsource Solutions – Growth sluggish; retaining a Hold
Anand Rathi Research 2
Quick Glance – Financials and Valuations
Fig 1 – Income statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Net revenues 30,034 31,747 34,569 33,564 35,156
Revenue growth (%) -4.0 5.7 8.9 -2.9 4.7
- Oper. expenses 26,538 28,254 31,176 30,184 31,270
EBIDTA 3,496 3,493 3,393 3,380 3,886
EBITDA margins (%) 11.6 11.0 9.8 10.1 11.1
- Interest 711 524 453 399 336
- Depreciation 722 662 590 630 698
+ Other income 378 650 1,019 969 665
- Tax 95 302 577 649 759
Effective tax rate (%) 3.9 10.2 17.1 19.6 21.6
+ Associates / (minorities) -2 -4 8 -0 -0
Adjusted PAT 2,345 2,650 2,800 2,671 2,757
+ Extraordinary items - - - - -
Reported PAT 2,345 2,650 2,800 2,671 2,757
Adj. FDEPS (` / sh) 3.3 3.8 4.0 3.9 4.0
Adj. FDEPS growth (%) 19.0 13.1 5.6 -2.6 3.2
Source: Company, Anand Rathi Research
Fig 3 – Cash-flow statement (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Adjusted PAT 2,345 2,650 2,800 2,671 2,757
+ Non-cash items 722 662 590 630 698
Cash profit 3,066 3,312 3,390 3,301 3,455
- Incr. / (decr.) in WC 1,312 375 -36 883 -56
Operating cash-flow 1,754 2,937 3,425 2,418 3,511
- Capex -2,063 2,237 -4,788 778 1,359
Free cash-flow 3,817 700 8,214 1,640 2,152
- Dividend - - - - -
+ Equity raised -2,372 717 -6,778 - -
+ Debt raised -1,825 -1,413 -1,014 -847 -2,460
- Investments 681 118 723 5 -451
- Misc. items - - - - -
Net cash-flow -1,061 -113 -301 788 144
+ Op. cash & bank bal. 1,863 802 689 388 1,175
Cl. Cash & bank bal. 802 689 388 1,175 1,320
Source: Company, Anand Rathi Research
Fig 5 – Price movement
Source: Bloomberg
Fig 2 – Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
Share capital 6,663 6,733 6,813 6,813 6,813
Reserves & surplus 14,223 17,518 13,468 16,139 18,896
Net worth 20,886 24,251 20,281 22,952 25,709
Total debt 10,116 8,775 9,224 8,377 5,918
Minority interest 16 20 12 12 12
Def. tax liab. (net) 345 272 -1,191 -1,191 -1,191
Capital employed 31,363 33,318 28,326 30,150 30,448
Net fixed assets 855 971 1,061 651 753
Intangible assets 23,669 25,128 19,660 20,219 20,778
Investments 734 852 1,574 1,579 1,128
- of which, Liquid 676 768 1,523 1,523 1,066
Working capital 5,303 5,678 5,643 6,525 6,470
Cash 802 689 388 1,175 1,320
Capital deployed 31,363 33,318 28,326 30,150 30,448
Working capital (days) 64 65 60 71 67
Book value (` / sh) 29.8 34.7 29.0 33.5 37.5
Source: Company, Anand Rathi Research
Fig 4 – Ratio analysis @ `35
Year-end: Mar FY15 FY16 FY17 FY18e FY19e
P/E (x) 10.3 9.1 8.6 8.9 8.6
Cash P/E (x) 7.9 7.3 7.1 7.2 6.8
EV / EBITDA (x) 9.1 8.8 9.0 8.6 6.9
EV / sales (x) 1.1 1.0 0.9 0.9 0.8
P/B (x) 1.2 1.0 1.2 1.0 0.9
RoE (%) 11.2 11.7 12.6 12.4 11.3
RoCE (%) 8.2 7.8 7.3 7.2 7.9
Dividend yield (%) - - - - -
Dividend payout (%) - - - - -
Net debt / equity (x) 0.4 0.3 0.4 0.2 0.1
Debtor (days) 60 61 59 58 57
Inventory (days) - - - - -
Payables (days) 10 10 10 10 10
CFO:PAT % 104.9 112.9 71.0 98.8 135.9
CFO:sales % 8.2 9.4 5.7 7.9 10.7
Source: Company, Anand Rathi Research
Fig 6 – Revenue
Source: Company
0
10
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60
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Nov-13
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Nov-15
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(`)
FSOL
131
128
127
130
132
124
125
126
127
128
129
130
131
132
133
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
($m)

3. 8 August 2017 Firstsource Solutions – Growth sluggish; retaining a Hold
Anand Rathi Research 3
Result Highlights
Q1FY18 Results at a Glance
Fig 8 – Quarterly result
Year-end: Mar Q1 FY18 % q/q % y/y FY17 FY16 % y/y
Sales ($ m) 132 1.8 0.8 515 485 6.3
Sales (` m) 8,507 (1.6) (2.8) 34,569 31,747 8.9
EBITDA (` m) 735 3.5 (27.2) 3,393 3,493 (2.9)
EBITDA margin (%) 8.6 42 bps -289 bps 9.8 11.0 -119 bps
EBIT (` m) 582 (3.0) (31.2) 2,803 2,831 (1.0)
EBIT margin (%) 6.8 -10 bps -282 bps 8.1 8.9 -81 bps
PBT (` m) 794 4.3 (13.4) 3,369 2,957 13.9
Tax (` m) (140) 24.6 (23.6) (577) (302) 90.9
Tax rate (%) (17.6) -287 bps 235 bps (17.1) (10.2) -690 bps
Net Income (` m) 654 0.0 (10.9) 2,800 2,650 5.6
Source: Anand Rathi Research
Fig 7 – Segment-wise results
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q/Q % Y/Y %
Revenues ($ m) 131 128 127 130 132 1.8 0.8
Growth Y/Y % 12.3 6.7 4.4 2.1 0.8 ‐132 bps ‐1152 bps
Volume growth % 6.7 3.6 8.5 4.8 -10.7 ‐1550 bps ‐1741 bps
Revenues (` m) 8,753 8,572 8,601 8,644 8,507 -1.6 -2.8
Eff. exchange rate 66.9 66.9 67.8 66.7 64.5 -3.3 -3.6
Employees (EoP) 24,148 24,910 25,992 25,871 25,013 -3.3 3.6
Revenue productivity ($ ‘000/employee) 5.4 5.1 4.9 5.0 5.3 5.3 -2.7
No. of seats 23,920 22,797 22,370 22,880 23,136 1.1 -3.3
Seat-fill factor (%) 71.8 72.1 75.0 79.0 73.0 ‐600 bps 120 bps
CoR (excluding D&A) (5,817) (5,950) (5,901) (6,167) (5,942) -3.7 2.1
As % of revenue -66.5 -69.4 -68.6 -71.3 -69.8 150 bps ‐338 bps
SG&A (1,926) (1,768) (1,882) (1,766) (1,830) 3.6 -5.0
As % of revenue -22 -21 -22 -20 -22 ‐108 bps 49 bps
EBITDA 1,009 854 818 711 735 3.5 -27.2
EBITDA margin % 12 10 10 8 9 42 bps ‐289 bps
EBIT 846 694 663 600 582 -3.0 -31.2
EBIT margins % 10 8 8 7 7 ‐10 bps ‐282 bps
Other Income 201 275 267 275 320 16.6 59.0
Forex gain / loss 180 271 253 279 271 -3.1 50.5
PBT 916 861 831 761 794 4.3 -13.4
PBT margins % 10 10 10 9 9 53 bps ‐114 bps
Taxes (183) (149) (134) (112) (140) 24.6 -23.6
ETR % -20 -17 -16 -15 -18 ‐287 bps 235 bps
PAT 734 712 698 649 654 0.8 -10.9
PAT margin % 8 8 8 8 8 18 bps ‐69 bps
Source: Anand Rathi Research

4. 8 August 2017 Firstsource Solutions – Growth sluggish; retaining a Hold
Anand Rathi Research 4
Conference Call Takeaways
Company
 The deal pipeline in Q1 FY18 was $300m (Q4 FY17: $375m), partly
bruised by GBP movement and partly by delays in decision-making.
 Reduction in headcount by 858 during the quarter was due to
significantly lower demand in its domestic business (telecoms is under
pressure) and the seasonal impact of the healthcare business in the US.
 The sale of its domestic business is progressing according to plan and
is expected to be complete by August. This would result in a 4,500
reduction in headcount in Q2 FY18.
 Management is sanguine regarding the Healthcare (36.2% of revenue)
and customer-management (49.5% of revenue) businesses, and has a
strong deal pipeline in both these.
Business outlook
 The company’s FY18 revenue growth (in constant currency) would be
in line with the industry growth rate of ~6-8% (excl. the sale of its
domestic business). Including that, comparable growth would be ~150-
175bp lower than the earlier 6-8% growth guidance.
 Overall, in constant currency, management expects margins to climb
considerably from Q2. On a reported basis, the margin would improve
by ~50bps, driven by a turnaround in ISGN (losses to move from –
$460K in Q1 to +$200K in Q2 FY18).
 The tax rate in FY18 would be 17-19%.
 The company expects to be debt-free by FY19.
Notes from the last quarter’s conference calls
From Q4 FY17
 The company expects Q1 FY18 to be subdued and largely similar to
Q4 FY17. Management expects things to be buoyant from Q2 FY18.
 The company’s FY18 revenue growth (in constant currency) would be
in line with the industry’s ~6-8% growth rate. Rupee growth would be
lower due to currency shifts.
 The tax rate in FY18 would be 17-20%.
From Q3 FY17
 Q4 FY17 revenue would reflect the benefits of the Sky deal but would
also see pressure at the margin level.
 PAT in Q4 is expected to be flattish yoy due to further investment
required and adverse currency movements.
 FSOL is geared to strong growth in FY18 but expects macro-economic
volatility to play spoilsport if regulations prove adverse.

5. 8 August 2017 Firstsource Solutions – Growth sluggish; retaining a Hold
Anand Rathi Research 5
Factsheet
Fig 9 – Revenue
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Revenues ($ m) 131 128 127 130 132
Source: Company, Anand Rathi Research
Fig 10 – Revenue by area
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
North America 54 55 56 55 53
UK 38 38 38 38 41
India 6 7 6 6 6
APAC (RoTW) 2 0 1 0 0
Source: Company, Anand Rathi Research
Fig 11 – Revenue by vertical
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
BFSI 32 36 31 28 27
Telecoms 33 30 33 33 37
Life Sciences 35 35 36 38 36
Others 0 0 0 1 0
Source: Company, Anand Rathi Research
Fig 12 – Client concentration
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Top client 21 20 24 24 28
Top-5 clients 42 44 45 43 47
Source: Company, Anand Rathi Research
Fig 13 – Revenue by delivery location
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Offshore 21.4 20.6 22.9 21.8 20.7
Domestic 5.7 5.9 5.6 6.1 6.2
Onshore 72.8 73.5 71.5 72.1 73.1
Source: Company, Anand Rathi Research
Fig 14 – Workforce spread
(%) Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
India 60 61 60 60 61
Abroad 40 39 40 40 39
Total 24,148 24,910 25,992 25,871 25,013
Source: Company, Anand Rathi Research
Fig 15 – Seats
Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18
Number of seats 23,920 22,797 22,370 22,880 23,136
Seat-fill factor (%) 72 72 75 79 73
Source: Company, Anand Rathi Research

6. 8 August 2017 Firstsource Solutions – Growth sluggish; retaining a Hold
Anand Rathi Research 6
Valuations
The stock trades at 8.6x FY19e EPS of `4. This, we think, is fair, given that
the business is struggling to match organic industry-level growth, faces
currency and macro-economic headwinds in the UK, and given our fears of
the impact of automation on the business.
We are giving Firstsource (a BPO company) a 25% discount to mid-sized
generic IT-services companies, reflecting its weaker balance sheet, slower
organic growth, and higher top client and the UK concentration. IT
services companies, being higher up the value chain than BPO companies,
command a higher billing rate and enjoy higher margins than BPO
companies. We believe that, at this stage, automation threats may be greater
for BPO companies than for IT-service companies. For Firstsource
particularly, client concentration also seems high, with the top client
contributing 28%, and the top-five 47%, of revenue.
Our target price is based on a PE of 9x, which also reflects an
EV/EBITDA of 8.6x.
Fig 16 – Change in estimates
FY18 FY19
New Old Chg % New Old Chg %
Revenues ($ m) 520 539 (3.5) 545 571 (4.5)
Revenues (` m) 33,564 35,969 (6.7) 35,156 38,104 (7.7)
EBITDA (` m) 3,376 3,751 (9.8) 3,882 4,037 (3.8)
EBITDA margin % 10.1 10.4 -37bps 11.0 10.6 45bps
EBIT (` m) 2,747 3,174 (13.5) 3,184 3,398 (6.3)
EBIT margin % 8 9 -64bps 9 9 14bps
PAT (` m) 2,669 2,903 (8.1) 2,755 2,915 (5.5)
Source: Anand Rathi Research
Fig 17 – PE band
Source: Bloomberg, Anand Rathi Research
Risks
 Dependent on inorganic growth: The company is using acquisitions
and lift-out deals to accelerate revenue growth. This, though, comes
with risks associated with inorganic growth measures.
 Long-term risks due to automation: We reckon that the BPO sector
might see slower-than-industry revenue growth on account of the
impact of automation on the industry.
0
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FSOL

7. Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.
Important Disclosures on subject companies
Rating and Target Price History (as of 8 August 2017)
FSOL
9
1
2
3 4
5
6
7
8
20
25
30
35
40
45
50
55
Jan-14
Mar-14
Jun-14
Sep-14
Nov-14
Feb-15
May-15
Jul-15
Oct-15
Jan-16
Apr-16
Jun-16
Sep-16
Dec-16
Feb-17
May-17
Aug-17
Date Rating
TP
(`)
Share
Price (`)
1 28-Oct-14 Buy 59 39
2 17-Nov-14 Buy 57 40
3 09-Apr-15 Buy 47 31
4 04-Aug-15 Buy 40 32
5 13-May-16 Sell 40 40
6 28-Jul-16 Sell 44 47
7 28-Oct-16 Hold 44 39
8 31-Jan-17 Hold 42 39
9 08-May-17 Hold 40 39
Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014
Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of Anand Rathi Financial Services Ltd. ARSSBL is a
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engaged in the business of Stock Broking, Depository Participant and Mutual Fund distributor.
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