FSL - Aditya Birla Money

Q2FY13 Results - Key Highlights

For the quarter Q2FY13, FSL posted a healthy revenue growth of 6.3% to Rs.7176.3 mn from Rs.6751.7 mn and grew by 34.6% on YoY basis. Despite strong headwinds in BFSI & healthcare provider segment, the revenue has grown by 5.4% on constant currency terms (QoQ). Telecom vertical continued to see strong tractions (12.2% on QoQ basis) and led the growth engine, followed by BFSI (4.1%) On geographical basis, UK (13.4%) & India (14%) led the show. Post last year's $160 mn deal, FSL's client mining has improved significantly, which continued to grow at rapid pace (Top client (25.6%) and Top 5 clients (13.1%) on QoQ basis.

EBITDA increased by 22 3% to Rs.680 7 mn from Rs.556 7 mn on QoQ basis with a margin improvement of 124 bps to 9 48%. Combination of operational efficiency (Seat factor 80% vs 77% in Q113) and cost rationalization initiatives (Other expenses as % of sales reduced to 21.5% vs 22.7% in Q113) helped them to improve the margins. Management is quite confident of further operational improvement going forward, thanks to better deal pipeline and available operational levers.

PAT improved at a healthy rate of 24% to Rs.359.3 mn (QoQ) and an increase of 68.1% on YoY basis.

CESC's lifeline: CESC is set to acquire 49.5% stake in FSL for ~Rs.395 cr. In that, 34.5% would be through preferential allotment (22.68 cr shares @ Rs.12.1/share, i.e., Rs.274 cr) and rest 15% from existing share holders such as ICICI Bank, Metavante and Aranda (5% each on post diluted capital) @ Rs.12.2/share, i.e., ~Rs.120 cr. Post that, CESC would make an open offer upto 19.84 cr shares @ 12.1/share to public, which is 29.5% of post-diluted equity. Even though, the current deal would have huge equity dilution for FSL nevertheless this deal would bring stability & consolidation of shareholding under one umbrella and cash infusion (~$51 mn). We believe these two aspects would address the short term ( FCCB redemption) and long term ( focused management) issues of FSL.

On Dec'12, FSL has to repay $237 mn (including redemption premium) worth of FCCB. Currently, FSL has a) cash worth of $145 mn and b) $51 mn capital infusion from CESC, which would leave moderate gap of only $30-40 mn for additional funding. We believe the current strong operational performance & deal pipeline would help them to get refinancing done comfortably. Post-FCCB redemption, FSL would have debt: equity ratio of 0.68:1.

Valuation:

The results were ahead of our estimates on operational basis. We revise our PAT estimates upwards for FY13E and FY14E by 16.9% & 20.8% respectively to factor in healthy pipeline & better than expected execution capabilities and adjust our earnings (for equity dilution) to Rs.2.07/share & Rs.2.35/share respectively. Currently, the stock trades at 5.9x & 5.2x on its FY13E & FY14E earnings (on post-diluted equity base). We value FSL at 6x on its one year forward earnings with revised target of Rs.14.53 and reiterate our Buy rating based upon improved visibility and bring better focus (shareholding with one entity).

Source : Equity Bulls

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