Investor's Eye: Update - Firstsource Solutions, Banking

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Investor's Eye [March 20, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Firstsource Solutions Recommendation: Buy Price target: Rs37 Current market price: Rs27 Strong Q4FY2014 on cards, retain Buy Key points In an interaction with us the management of Firstsource Solutions Ltd (FSL) reaffirmed that the improving trend in the margins would sustain and expects margin expansion of close to 100BPS sequentially to 12.7-12.8% during Q4FY2014. Thus, FSL is set to deliver a growth of close to 30% in its consolidated earnings in FY2014. The outlook for FY2015 is also robust and the management's confidence stems from a strong order pipeline of nearly $400 million. The company expects a 10% growth in the revenues in constant-currency terms but the substantial improvement in the margins would lead to a healthy growth in the earnings during FY2015.  With the business turn-around gaining momentum on the back of a considerable improvement in the financial health, there is a strong case for upside in FSL in the next 12 months. At the current market price of Rs27 the stock trades at undemanding valuations of 5.2x and 3.8x EV/EBITDA and 6.4x and 4.8x PER based on the FY2015 and FY2016 earnings estimates respectively. We retain our Buy rating on the stock with a 12-month price target of Rs37. The stock could also be a good play in the run-up to the announcement of the Q4FY2014 results, which are expected to be strong.   SECTOR UPDATE Banking Private banks better placed to ride recovery cycle Key points The private sector banks are favourably positioned vs the public sector banks (PSBs) to expand their balance sheet as the economy recovers, mainly due to a better capital position, an improved liability structure and lesser NPAs. On the other hand, the balance sheet growth of the PSBs (barring large PSBs like SBI, PNB, BoB) are likely to be constrained for the want of capital and rising NPAs. In terms of asset quality, despite some near-term stress the private banks are likely to maintain their edge on the PSBs due to a higher exposure to the retail sector. We expect the profitability and return ratios of the private banks to remain reasonably strong led by stable margins and healthy asset quality. Despite the recent run-up in the private banks, banks like Axis Bank, Yes Bank and Federal Bank are trading at a 15-25% discount to their respective five-year mean valuations. ICICI Bank is trading at close to its mean valuation, though we expect its valuation to expand (due to a structural improvement in its balance sheet, a strong growth outlook). We have rolled over our valuation multiples for the private banks under our coverage to the FY2016 estimates. This has resulted in an upward revision in the price target of these banks. ICICI Bank and Federal Bank remain our top picks among the private banks.  Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

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