Bangalore-based 24/7 Customer, India’s fifth largest independent, third-party business process outsourcing (BPO) firm, has decided to hold off its initial public offering (IPO) till the end of 2008. Co-founder and CEO P.V. Kannan says the company will go for a public issue “no later than the first quarter of 2009”.
The decision to wait runs contrary to the recent flurry of IPOs by peers such as WNS Global Services, Firstsource Solutions and EXL Services. In a few weeks, Gurgaon-based Genpact will debut on Nasdaq with an estimated $600 million (Rs2,460 crore) IPO.
All five players share certain traits. They are backed by private equity investors and rank among the top five independent BPOs in the country that are not part of a larger group. Their public debuts mark the maturing of the third-party BPO industry in India which accounts for about 50% of the industry’s $8 billion export revenue. In an exclusive interview with Mint, Kannan lays on the table the reasons for delaying the IPO and how growth will play out for the company in the next 18 months. Edited excerpts:
Most of your peers have either gone public or will do so shortly. What is holding you back?
We’ve been executing a huge capital expenditure cycle and building out capacities organically. We’ve added additional capacity in Bangalore and then there was Manila and Northern Ireland. We’ve invested $40-50 million so far. This cycle will be through by March 2008. We should have about $150-180 million in revenues by April 2008. We think that when we reach $250-300 million in revenues, we will be able to look at a market capitalization of $1 billion. That will allow us to do certain things, and listing at that point makes much more sense. We will list no later than the first quarter of 2009.
But isn’t there pressure from your investors?
We didn’t get in an investor till three-and-a-half years after the company started in 2000. We (the founders, Kannan and S. Nagarajan started the company with $7 million of their own capital) were very clear that our investors would not tell us when to go for an IPO and how we would run the company. You can set down such terms when the company is?majority-owned by founders. Sequoia Capital, that invested in us, is a very mature venture capital fund. It has a seven-year horizon on investments and is not in a hurry to exit.
Why haven’t you looked at acquisitions as growth strategy?
We did look at acquisitions a couple of years ago. We certainly had the capital, both from our own internal reserves and from Sequoia’s $22 million investment. But we weren’t able to find targets that fit our requirements. So we decided to go the organic way. We now have 4,500 people across our seven centres in India and overseas.
You set up operations in Northern Ireland this February. How does this fit into your overall growth strategy? What’s next?
The Northern Ireland operation is part of our overall strategy to set up multi-geography delivery capabilities. It will be our launch pad for delivering services in Europe, which requires services in several languages. We have 100 people there now and can deliver services in 18 languages. Our other non-India centres are in Manila and Guatemela. We are also setting up shop in Shanghai next month. Manila will have 4,000 people in two years. The Shanghai centre will have 50 people to start with.
How do billing rates overseas compare with India?
Billing rates in overseas centres are typically 10-15% higher than India. By 2010, India will account for 60% of our revenues. It currently accounts for 90%. We’re doing a revenue run rate of $100 million per year.
How much of a setback has the termination of the Aviva contract been (24/7 Customer’s contract with UK insurer Aviva expired in January 2007)?
Aviva always had long-term investment plans for India. It was understood from the beginning that they would ultimately own everything. The fact that vendors such as 24/7 Customer, WNS and EXL did not pay for the infrastructure was a clear signal. Yes, we did undergo a temporary setback when our BOT (build, operate, transfer) contract expired. It did take 1,500 people off, and about 20% of our revenues. But we were not unprepared. We are now setting up a new centre for them in Chennai, also on a BOT contract, with 1,700-1,800 seats. That benefit will flow into our balance sheet in the fourth quarter of 2007.
How do your revenues split up between geographies and verticals?
BFSI (banking and financial services and insurance) remains our biggest vertical in terms of revenue contribution. About two-thirds of revenues come from there. In terms of geography, the US accounts for 50%. Voice-based services account for 80%.