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McClatchy-Tribune  06/10/2014 3:48 AM ET
Mint, New Delhi R. Sree Ram column [Mint, New Delhi :: ]

June 10--CESC Ltd's purchase of Firstsource Solutions Ltd, once derided as unrelated diversification, is proving to be a smart investment. The financial performance of the business process outsourcing firm has improved remarkably under the new promoter. Revenue increased 10% last fiscal year. Profit grew by a robust 31%, as reduction in low-margin clients and rationalization of staff helped Firstsource Solutions improve profitability.

The performance may remain upbeat this fiscal year also. The company is focusing on "profitable growth" and is reducing debt to conserve earnings. Last fiscal year it repaid $45 million. If Firstsource Solutions continues the current repayment rate, net debt could fall from the present $125 million to $10 million in two-three years (by 2016-17), ICICI Securities Ltd said in a note.

The improving financial profile has led to a ratings upgrade. Crisil Ltd has recently upgraded the company's rating on short-term bank facilities. "Crisil believes that Firstsource will sustain its operating profitability on the back of cost and client rationalization, while its financial risk profile will be supported by improving cash accruals, healthy cash reserves and absence of debt-funded expansion plans, over the medium term," Crisil said in a statement.

According to the ratings agency, Firstsource Solutions' net cash accruals to total debt ratio improved to 0.23 times from 0.13 times for 2012-13. Similarly its interest coverage ratio increased to 4.3 times from 2.3 times.

The improving performance has lifted Firstsource Solutions' share price. Over the past one year, the stock more than tripled. Consequently the value of CESC's stake -- it invested Rs.454 crore for a 57% stake -- in Firstsource Solutions has seen a similar rise. A year ago, the contribution of Firstsource Solutions to CESC's stock valuation was pegged at Rs.24-28 per share. Thanks to the rise in the market value, analysts have now increased that to Rs.72-73 (after the holding company discount).

"We revise our SOTP (sum of the parts) based PT (price target) we assign higher value to Firstsource, higher multiple to stand-alone distribution business, and roll forward our valuation to FY16," said Emkay Global Financial Services Ltd. The optimism has driven up the CESC share price. The stock has gained almost 80% in the past year.

Overall, even though CESC's stand-alone performance has been unexciting in the last fiscal year, improving performances at Firstsource Solutions and the reduction of losses in its retail business are helping the stock trade with a positive momentum.

The current valuation of 1.1 to 1.2 times the 2014-15 estimated book value is not demanding. But for the CESC stock to continue its northward journey, the company has to reach two milestones this fiscal year. One is to achieve break-even at the retail business (Spencer's). The second is to find a long-term power purchaser for its idle power units at Chandrapur in Maharashtra.


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