FirstSource Solutions – Top Midcap Pick by Merill Lynch

Merill Lynch [ML] is adding Firstsource to top mid-cap picks. ML forecast a 38% EPS
CAGR growth (post IPO dilution) over next 2 years led by a 44% CAGR revenue growth which has high visibility given the annuity nature of BPO. ML is correspondingly removing Sasken which is likely to see poor stock performance till key product shipments start in 2HFY08.

ML forecast 50% PAT growth and 38% EPS CAGR over the next two years. 44% revenue growth driven by mining of existing clients as well as inorganic moves like the partnership with US banking tech major Metavante and the recent BPM Inc. acquisition in Jan 07. Q1FY08 is likely to be seasonally weak given wage hike and continued ramp costs of Hutch / Vodafone, a 4000 person account.

FirstSource is trading at 25x FY08 PE and 17x FY09 PE which we believe is reasonable given the high 50% PAT CAGR over FY07-09. Moreover, BPO is a more nascent business with high growth potential and operating leverage and is a sticky and annuity business model.

Other top Midcap picks from Merill Lynch are IVRCL, Welspun India, Biocon and Panacea Biotech.