Firstsource Solutions Ltd’s shares rose by as much as 16.6% intra-day on Wednesday on rumours that a large technology company is likely to pick up ICICI Bank Ltd’s stake in the company. Nearly 30 million shares changed hands on the National Stock Exchange and Bombay Stock Exchange, compared with a daily average of a little over 3 million since the begining of the year.
The volume weighted average price of all trades on Wednesday amounted to Rs12.9 per share, 10% higher than Tuesday’s close. But the rally fizzled late afternoon, with the company’s shares closing at Rs12.1, up 2.38%.
There were reports late last year that ICICI Bank may have to reduce its stake in the company to 10% to comply with the central bank’s revised norms on investments by banks in non-financial services businesses. Firstsource’s shares have doubled this year, from its low of Rs 5.75 late last year, and have recovered a large part of the losses in the second half of 2011.
Earlier, between July and December, the company’s shares lost two-thirds of their value, as foreign institutional investors cut stake from 9.98% to just 0.98%. This was despite the company’s ability to raise a term loan of $180 million to help it refinance its large FCCB obligation, which is due in December 2012. The company has bought back bonds with face value worth close to $105 million, which leaves bonds worth $170 million outstanding.
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BPO firm Firstsource’s shares rose sharply on Thursday on rumours that an IT firm may pick up stake in it. Mint’s Mobis Philipose decodes what it all means for Firstsource and its investors
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Besides, the sharp depreciation in the rupee to Rs 53 will have certainly scared foreign investors off, since this alone increased its term loan repayment obligation by about 20%. What’s more, the company’s results in the current financial year have been dismal, with pre-tax profit falling by as much as 54%, even after excluding the accounting losses related to the buyback of bonds.
But the rally this year has given a glimmer of hope to investors that have remained with the firm, and especially ICICI Bank, in getting a decent valuation for its stake sale. A deal will lift sentiment for the stock, although it’s unlikely that it will result in an open offer.
Also see | Changing sentiment (PDF)
The company’s financial performance is also expected to improve, thanks to some large deals it won last year. Brokerage Aditya Birla Money, for instance, expects the firm’s earnings per share to nearly double to Rs 2.7 in financial year 2012-13 on the back of better revenue flow as well as cost rationalization initiatives by the company. This translates into a price-earnings ratio of just 4.5 times.
Even so, there still remains a gap as far as the funding of the company’s FCCB obligation goes. Firstsource is also exposed to the vagaries of the currency market, since it is has not hedged foreign currency loan obligations. Because of these concerns, further upside may be limited.
Graphics by Yogesh Kumar