UnBPO And AI Will Expand Health Care And Fintech Opportunities

Key Takeaways

• Strategic focus on AI and automation, coupled with cost management, could boost operational efficiency and enhance net margins.
  
• Expanding into new markets and diversifying revenue streams with key healthcare and fintech deals could positively impact future revenue growth.
  
• Macroeconomic and seasonal challenges, along with reliance on new deals and investments, could pressure revenue growth and margins, impacting financial stability.

Catalysts

Provides tech-enabled business processes in India, the United Kingdom, the United States, Asia, South Africa, the Philippines, Australia, New Zealand, and internationally.

• Firstsource Solutions has achieved significant deal wins, signing 14 large deals in FY '25 with a record Total ACV intake, indicating strong demand and improving revenue visibility for future periods. This is likely to impact revenue growth positively.
  
• The company's strategic transformation involving the UnBPO framework and focus on artificial intelligence and automation potentially positions it as a disruptor, aiming to improve efficiencies and technological offerings, which could enhance net margins over time.
  
• Expansion into new geographies and verticals, coupled with new client acquisitions, specifically substantial engagements in health care and financial technology, shows potential for diversified revenue streams, positively impacting revenue growth.
  
• Cost management strategies, including increasing offshore and nearshore hiring and strategic investments in AI and automation, are set to improve operational efficiency, contributing positively to net margins.
  
• The company is focusing on improving its sales and solutions teams and leveraging key client engagements for incremental business, which should drive earnings growth through increased client penetration and enhanced deal conversions.

Firstsource Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Firstsource Solutions's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 9.8% in 3 years time.
• Analysts expect earnings to reach ₹11.9 billion (and earnings per share of ₹16.94) by about May 2028, up from ₹5.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.7x on those 2028 earnings, down from 39.6x today. This future PE is greater than the current PE for the IN Professional Services industry at 27.0x.
• Analysts expect the number of shares outstanding to grow by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.13%, as per the Simply Wall St company report.

Firstsource Solutions Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainties in the UK and other regions could slow decision-making, impacting new deal conversions and future revenue growth.
  
• The transformation and AI-driven deals have staggered revenue recognition, which may not provide immediate revenue increase, affecting short-term earnings visibility.
  
• A significant percentage of revenue growth relies on new large deal executions that have inherent risks in ramp-up and delivery, which could impact net margins if not managed effectively.
  
• Seasonal softness, particularly in the retail and European markets, might result in revenue volatility, affecting overall growth projections and financial stability.
  
• Increased investments and upfront costs for new deals and expansion, particularly in offshore locations, might pressure near-term margins, impacting profit sustainability.

Valuation

• The analysts have a consensus price target of ₹386.545 for Firstsource Solutions based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹121.1 billion, earnings will come to ₹11.9 billion, and it would be trading on a PE ratio of 32.7x, assuming you use a discount rate of 13.1%.
  
• Given the current share price of ₹340.7, the analyst price target of ₹386.55 is 11.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.