Bull's Eye

FIRSTSOURCE SOLUTIONS
RESEARCH: JP MORGAN RATING: OVERWEIGHT CMP: Rs 31
JP MORGAN is overweight on Firstsource Solutions. The company is the fourth-largest pure-play BPO exporter from India with a well-diversified business mix across geographies and industry verticals, hybrid onsite-offshore model, focus on output-based pricing models, marquee clients, M&A expertise, and a decent execution track record. India-based BPO exports ($11 billion in FY08) offer a high growth opportunity. JP Morgan expects Firstsource to benefit from the polarisation towards larger players. The company has the following advantages: 1) Financial performance in line with industry expectations, with 28% revenue, 28% EBIT and 17% EPS CAGR over FY08-FY10E. 2) Significant improvement in free cash flow, led by limited capital expenditure. 3) High rerating potential, as Firstsource is trading 30%+ below its US-listed peers, despite comparable performance on revenues and margins. The P/E-based, December ’08 target of Rs 45 assumes target trailing/forward P/Es of 18x/14x, implying a 15% discount to Satyam. Downside risks include: 1) High debt-equity ratios, limiting the financial flexibility with rollover risks when debt falls due in ’12; 2) Possibility of fund-raising in the medium term; 3) Continued weakness in the US collections business; and 4) Rupee’s appreciation.

RELIANCE COMMUNICATIONS
RESEARCH: GOLDMAN SACHS RATING: BUY CMP: RS 438
GOLDMAN Sachs maintains a ‘buy’ rating on RCom. There are two key catalysts for the stock, panning out over the next 6-9 months — launch of RCom’s pan-India GSM services and RCom securing external tenancy on its tower network — thus crystallising the value of RCom’s core business and its tower subsidiary. Any outcome of RCom’s dialogue with MTN for a potential combination of their businesses will be neutral-to-positive for shareholders, unless RCom overstretches its balance sheet in the process (FY09E net debt-to-equity ratio is 0.58). The revised 12-month target price of Rs 678, incorporating the regional strategy team’s risk-free rate forecast of 9% for India, and thus raising assumed weighted average cost of capital for RCom to 12.1%, implies a 43% upside from RCom’s current share price. RCom’s target price is a sum of value of its business (Rs 672/share) and net proceeds (Rs 6/share) from the 5% stake sale in Reliance Infratel in July ’07. Goldman pegs RCom’s core business value at Rs 562/share and attributable tower business value at Rs 110/share. The equity value of RCom’s tower subsidiary (Reliance Infratel) is $7.6 billion. Key risks include: (1) Delay in pan-India GSM roll-out beyond H2 FY09; (2) Poor uptake of external tenancy on its tower network; (3) Sub-par wireless KPIs.