The company's performance underscores its strengthening position in the commercial services and supplies sector, where it commands the largest market capitalisation among peers. With revenue crossing ₹2,300 crores for the first time in Q2 FY26, Firstsource demonstrated its ability to scale operations whilst maintaining healthy profitability metrics. The quarter marked the seventh consecutive period of double-digit year-on-year revenue growth, validating the company's strategic focus on healthcare, banking and financial services, and communications sectors.
Financial Performance: Sustained Growth Across All Metrics
Firstsource Solutions delivered a comprehensive performance in Q2 FY26, with net sales reaching ₹2,312.22 crores, representing a sequential growth of 4.26% over Q1 FY26 and an impressive 20.09% year-on-year expansion. This marks the highest quarterly revenue in the company's history, building on the momentum established over the past several quarters. On a half-yearly basis (H1 FY26), the company reported consolidated revenues of ₹4,529.87 crores, up 21.89% compared to H1 FY25.
| Quarter | Revenue (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 | 2,312.22 | +4.26% | 179.52 | +6.02% | 7.76% |
| Jun'25 | 2,217.65 | +2.60% | 169.33 | +5.38% | 7.62% |
| Mar'25 | 2,161.46 | +2.81% | 160.69 | +0.24% | 7.41% |
| Dec'24 | 2,102.38 | +9.19% | 160.30 | +15.98% | 7.68% |
| Sep'24 | 1,925.38 | +7.50% | 138.21 | +2.20% | 7.15% |
| Jun'24 | 1,791.10 | +7.22% | 135.25 | +1.31% | 7.58% |
| Mar'24 | 1,670.46 | — | 133.50 | — | 8.00% |
Operating profit (PBDIT excluding other income) stood at ₹376.04 crores in Q2 FY26, up 30.87% year-on-year, with margins expanding to 16.25% from 14.86% in the corresponding quarter last year. This 139 basis points margin expansion reflects improved operational efficiency and better utilisation of the company's global delivery infrastructure. The operating profit to interest coverage ratio strengthened to 8.79 times in Q2 FY26, the highest level recorded, indicating robust debt servicing capability.
Net profit for Q2 FY26 reached ₹179.52 crores, marking a 29.88% year-on-year increase and a 6.02% sequential improvement. The PAT margin improved to 7.76% from 7.15% in Q2 FY25, demonstrating the company's ability to convert top-line growth into bottom-line expansion. Employee costs, which constitute the largest expense component for this labour-intensive business, rose to ₹1,361.77 crores, representing 58.89% of revenues, broadly stable compared to 62.87% in Q2 FY25, indicating improved productivity metrics.
Margin Expansion Story
Firstsource's operating margin expansion of 139 basis points year-on-year to 16.25% reflects the company's success in optimising its delivery model. The improvement comes despite wage inflation pressures in the business process outsourcing industry, highlighting effective automation initiatives, process improvements, and favourable client mix changes. The company has consistently maintained operating margins above 15% for the past seven quarters, establishing a new performance baseline.
Operational Excellence: Building on Five-Year Growth Trajectory
Firstsource Solutions has demonstrated consistent operational excellence, with five-year sales growth of 14.99% and EBIT growth of 16.29%, indicating the company's ability to scale profitably. The average return on equity (ROE) of 15.49% over this period reflects efficient capital utilisation, though the latest ROE of 14.34% suggests some moderation. This remains respectable for a services business with moderate capital intensity, particularly when compared to the industry average.
The company's balance sheet strength has improved materially, with long-term debt rising to ₹341.90 crores as of March 2025 from nil in the previous year, reflecting strategic borrowings to fund growth initiatives and acquisitions. The debt-to-EBITDA ratio of 1.74 times remains comfortable, whilst the net debt-to-equity ratio of 0.57 indicates moderate leverage that provides financial flexibility. The average EBIT-to-interest coverage ratio of 8.29 times demonstrates strong debt servicing capability, with the latest quarter showing even stronger coverage at 8.79 times.
Operating cash flow generation has been robust, with annual operating cash flow reaching a record ₹701 crores in FY25, up from ₹644 crores in FY24. This strong cash generation, equivalent to approximately 118% of net profit, reflects the capital-light nature of the business model and efficient working capital management. The company maintained a cash balance of ₹154 crores as of March 2025, providing liquidity for operational needs and growth investments.
Key Strength: Firstsource's consistent operating cash flow generation, averaging over ₹700 crores annually, combined with improving ROCE metrics (latest: 13.68%), demonstrates the company's ability to generate returns whilst maintaining financial flexibility. The absence of promoter pledging and high institutional holdings of 33.88% further underscore investor confidence in the business model and management quality.
Sector Positioning: Leading the Commercial Services Space
Within the commercial services and supplies sector, Firstsource Solutions holds the position of the largest company by market capitalisation at ₹24,771 crores. The company's diversified client base across healthcare, banking and financial services, communications, media and technology, and other industries provides revenue stability and cross-selling opportunities. The healthcare revenue cycle management business, in particular, has emerged as a significant growth driver, benefiting from increasing outsourcing trends amongst US healthcare providers.
The business process management industry continues to evolve, with clients increasingly seeking partners who can deliver digital transformation alongside traditional process outsourcing. Firstsource has invested in automation, artificial intelligence, and analytics capabilities to stay relevant in this changing landscape. The company's focus on domain expertise in specific verticals, rather than being a generalist player, has enabled it to command premium pricing and build sticky client relationships.
| Company | Market Cap (₹ Cr) | P/E Ratio | ROE (%) | P/BV |
|---|---|---|---|---|
| Firstsource Solutions | 24,771 | 40.31 | 15.49 | 6.11 |
| eClerx Services | — | 37.80 | 20.08 | 0.88 |
| Alldigi Tech | — | 18.52 | 20.92 | 5.16 |
| Digitide Solutions | — | 15.16 | 0.00 | 3.42 |
Compared to listed peers, Firstsource trades at a premium valuation with a P/E ratio of 40.31 times versus the industry average of approximately 35 times. This premium reflects the company's consistent growth track record, improving profitability metrics, and leadership position. However, the elevated price-to-book value of 6.11 times, significantly higher than most peers, raises questions about whether the current valuation adequately reflects the business's return profile and growth prospects.
Valuation Analysis: Premium Pricing Limits Upside Potential
At the current market price of ₹354.35, Firstsource Solutions trades at 40.31 times trailing twelve-month earnings, representing a significant premium to both its historical average and the broader market. The company's PEG ratio of 2.21 suggests that the stock is pricing in growth expectations that may be challenging to meet consistently. The price-to-book value of 6.11 times, whilst justified by the company's ROE profile, leaves limited margin of safety for investors.
The enterprise value-to-EBITDA multiple of 21.32 times and EV-to-EBIT of 29.35 times are elevated compared to historical norms, reflecting the market's recognition of the company's quality attributes but also limiting potential for multiple expansion. The dividend yield of 1.13%, based on the latest dividend of ₹4 per share, provides modest income support but is not a primary driver of total return expectations.
| Metric | Current Value | Assessment |
|---|---|---|
| P/E Ratio (TTM) | 40.31x | Premium to industry (35x) |
| Price to Book | 6.11x | Elevated for ROE profile |
| EV/EBITDA | 21.32x | Above historical average |
| PEG Ratio | 2.21x | Growth not cheap |
| Dividend Yield | 1.13% | Modest income support |
The company's valuation grade has evolved from "Very Attractive" in July 2025 to "Fair" currently, reflecting the stock's price appreciation outpacing fundamental improvements. Based on a discounted cash flow analysis incorporating the company's growth trajectory, return profile, and sector dynamics, a fair value estimate of approximately ₹340-360 per share appears reasonable, suggesting limited upside from current levels. Investors seeking entry points may benefit from waiting for better risk-reward opportunities.
Shareholding Dynamics: Stable Promoter Base with Shifting Institutional Mix
The shareholding pattern of Firstsource Solutions has remained largely stable, with promoter holding steady at 53.66% over the past five quarters, reflecting the RP-Sanjiv Goenka Group's continued commitment through RPSG Ventures Ltd. The absence of any promoter pledging provides comfort regarding financial stability and alignment of interests with minority shareholders.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoters | 53.66% | 53.66% | 53.66% | 0.00% |
| FII | 9.25% | 9.58% | 10.08% | -0.33% |
| Mutual Funds | 17.83% | 17.09% | 17.40% | +0.74% |
| Insurance | 5.01% | 5.02% | 3.61% | -0.01% |
| Other DII | 1.79% | 1.83% | 1.89% | -0.04% |
Foreign institutional investors (FIIs) have been gradually reducing their stake, declining from 11.63% in September 2024 to 9.25% in September 2025, potentially reflecting profit booking after the stock's strong multi-year performance. Conversely, mutual fund holdings increased from 15.93% to 17.83% over the same period, with a notable 0.74% sequential increase in Q2 FY26, suggesting domestic institutional investors view the current valuation as reasonable for a quality growth story.
Insurance companies have substantially increased their stake from 0.78% in September 2024 to 5.01% currently, representing a significant vote of confidence. This shift in institutional composition, with domestic institutions increasing their presence whilst foreign investors pare stakes, is typical during periods of elevated valuations and reflects differing return expectations across investor categories. The total institutional holding of 33.88% provides reasonable liquidity and professional oversight.
Stock Performance: Exceptional Long-Term Returns Despite Recent Consolidation
Firstsource Solutions has delivered exceptional long-term returns, with the stock appreciating 1,016.06% over the past decade, massively outperforming the Sensex return of 214.31% by 801.75 percentage points. The three-year return of 243.70% and two-year return of 120.78% underscore the stock's strong momentum during the post-pandemic recovery period. However, recent performance has been more subdued, with the stock down 1.25% over the past year compared to the Sensex gain of 5.94%.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +3.20% | -1.38% | +4.58% |
| 1 Month | +10.15% | +2.77% | +7.38% |
| 3 Months | +2.96% | +3.01% | -0.05% |
| 6 Months | +4.84% | +3.67% | +1.17% |
| 1 Year | -1.25% | +5.94% | -7.19% |
| 3 Years | +243.70% | +36.93% | +206.77% |
| 5 Years | +403.34% | +105.48% | +297.86% |
The stock has underperformed its sector by 14.86% over the past year, with the Commercial Services & Supplies sector returning 13.61% compared to Firstsource's -1.25%. This underperformance reflects valuation concerns and profit booking after the extraordinary gains of previous years. The year-to-date performance shows a decline of 5.80% against the Sensex gain of 6.81%, indicating continued consolidation.
From a technical perspective, the stock is currently in a "Mildly Bearish" trend, trading below its key moving averages. The 52-week high of ₹422.80 stands 16.19% above current levels, whilst the 52-week low of ₹272.40 provides support 30.08% below. The stock's beta of 1.35 indicates higher volatility than the broader market, with annualised volatility of 39.57% classifying it as a high-risk investment. Recent one-month momentum of 10.15% suggests some stabilisation, but investors should remain cognisant of the elevated volatility profile.
Investment Thesis: Quality Growth Story at Fair Valuation
Firstsource Solutions presents a compelling investment case built on consistent operational execution, industry-leading market position, and improving profitability metrics. The company has successfully navigated the evolving business process management landscape by investing in digital capabilities, maintaining domain expertise in key verticals, and delivering consistent growth across economic cycles. The quality grade of "Good" reflects strong fundamentals, whilst the positive financial trend indicates continued momentum.
| Parameter | Assessment | Trend |
|---|---|---|
| Quality Grade | Good | Stable |
| Financial Trend | Positive | Improving |
| Valuation | Fair | Recently downgraded |
| Technical Trend | Mildly Bearish | Consolidating |
However, the current valuation of 40.31 times earnings and PEG ratio of 2.21 suggest that much of the positive outlook is already reflected in the stock price. The "Fair" valuation grade, downgraded from "Attractive" in recent months, indicates limited margin of safety at current levels. The mildly bearish technical trend and high volatility profile add to near-term uncertainty, making this more suitable for long-term investors rather than those seeking immediate gains.
"Firstsource combines quality fundamentals with consistent execution, but elevated valuations and technical weakness suggest patience may be rewarded with better entry opportunities."
Key Strengths & Risk Factors
KEY STRENGTHS
- Consistent Growth: Five-year sales CAGR of 14.99% and EBIT growth of 16.29% demonstrate sustained business momentum across cycles
- Margin Expansion: Operating margins improved to 16.25% in Q2 FY26, up 139 bps YoY, reflecting operational leverage and efficiency gains
- Strong Cash Generation: Operating cash flow of ₹701 crores in FY25 (118% of net profit) validates business quality and provides growth funding
- Market Leadership: Largest company in commercial services sector with diversified client base across healthcare, BFSI, and communications
- Healthy Balance Sheet: Debt-to-EBITDA of 1.74x and interest coverage of 8.79x provide financial flexibility for growth investments
- Stable Promoter Base: 53.66% promoter holding with zero pledging and increasing domestic institutional participation
- Track Record: Ten-year stock return of 1,016% demonstrates long-term value creation capability
KEY CONCERNS
- Elevated Valuation: P/E of 40.31x and PEG of 2.21 leave limited margin of safety; valuation grade downgraded from "Attractive" to "Fair"
- Recent Underperformance: Stock down 1.25% over past year vs Sensex gain of 5.94%; underperformed sector by 14.86%
- Technical Weakness: Mildly bearish trend with stock trading below key moving averages; 16% below 52-week high
- High Volatility: Beta of 1.35 and volatility of 39.57% indicate above-market risk profile
- FII Selling: Foreign institutional holding declined from 11.63% to 9.25% over past year, suggesting profit booking
- Moderating ROE: Latest ROE of 14.34% lower than five-year average of 15.49%, indicating some efficiency pressure
- Client Concentration: Revenue concentrated in specific geographies (primarily US) and sectors creates cyclical exposure
Outlook: What to Watch
POSITIVE CATALYSTS
- Sustained Revenue Growth: Quarterly revenue run-rate above ₹2,300 crores with consistent 4-5% sequential growth
- Margin Stability: Operating margins sustaining above 16% indicating structural improvement in business model
- New Client Wins: Success in adding marquee clients in healthcare and BFSI verticals driving pipeline visibility
- Digital Transformation: Investments in automation and AI capabilities enhancing service offerings and pricing power
- Market Share Gains: Outperforming sector growth rates suggesting competitive positioning improvements
RED FLAGS
- Valuation Correction: Any earnings disappointment could trigger multiple de-rating given elevated P/E of 40x
- Margin Pressure: Wage inflation in India and attrition challenges could compress margins below 15%
- Client Budget Cuts: Economic slowdown in key markets (US/UK) may lead to reduced outsourcing spending
- Currency Headwinds: Rupee appreciation against USD/GBP would negatively impact reported revenues and margins
- Competitive Intensity: Pricing pressure from larger IT services companies expanding into BPM space
The Verdict: Quality Business, But Wait for Better Entry
Score: 58/100
For Fresh Investors: Avoid initiating positions at current levels. Whilst Firstsource Solutions is a quality business with strong fundamentals and consistent execution, the valuation of 40x earnings and PEG ratio of 2.21 offer limited margin of safety. Wait for a correction towards ₹310-320 levels (approximately 10-12% downside) for a more attractive risk-reward profile.
For Existing Holders: Continue holding with a long-term perspective. The company's improving operational metrics, strong cash generation, and market leadership justify retention despite near-term valuation concerns. Consider partial profit booking above ₹380 if the stock rallies 7-8% from current levels, but maintain core holding given the quality of the franchise.
Fair Value Estimate: ₹340-360 (approximately 4% downside to neutral from current ₹354.35)
Note— ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
