Firstsource Solutions - Valuation rerating possible



The recent rumors of EXL Services, the NASDAQ listed BPO firm from India, getting sold have raised the prospect for the largest BPO company of India, Firstsource Solutions Ltd (FSL).

Stake sale in FSL by ICICI has also been rumored several times in the past but could not materialize because of some pricing issue. But the recent talk of IT biggies trying to buy EXL services have raised the hope for FSL shareholders to gain from the possible rerating in the valuations of FSL.


FSL at INR 16 bucks is currently trading at a PE multiple of just
5.1 times based on the expected EPS of 3.1 for FY11. The current market cap of the company is around 700 crores and the company generates revenue of over 2000 crores anually. The company is expected to do even better in FY-12 and FY-13 because of better business outlook in US.


The current rumors that EXL services bids are going as high as $1 Billion (~4500 crores) suggest strong apetite for good quality BPO firms. Just to understand the valuations of the company, For FY 11 EXL Services is expected to report a revenue of $300 Million (~1350 crores) and net income of around $31 Million (~140 crores). At $1 Billion the PE multiple of the company works out at little over 32, which is more than 6 times the current valuations of FSL.


If the rumor of EXL services becomes news the investors might see more than 100% appreciation in the stock price of FSL from the current levels of 16.



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