Bangalore: Indian back-office services firms such as Genpact Ltd, WNS (Holdings) Ltd and Firstsource Solutions Ltd have to focus on improving productivity and bid for higher value contracts that earn better margins from customers in the US and Europe, to manage rising costs, attrition and currency fluctuations, if they are to sustain the rising valuations in the booming industry.
Analysts say appreciation of the rupee against the dollar— the currency business processing outsourcing (BPO) firms bill most of their customers in—of around 8.5% in the last few months, would impact the profitability of these companies, which earn average margins between 15% and 18%.
“The currency appreciation has always happened, it is just a new thing to India. We will manage it,” said a confident Pramod Bhasin, chief executive officer of Genpact, which listed its shares on the New York Stock Exchange last week.
Genpact , a former outsourcing unit of General Electric Co., has seen its value rise four times in less than three years since it was spun off as an independent firm. Private equity players General Atlantic LLC and Oak Hill Capital Partners had bought 60% stake for $500 million (Rs2,300 crore then) in 2004 in the unit, then called General Electric Capital International Services with an enterprise value of $800 million. “The growth opportunities are huge and we are paid to manage that well,” Bhasin said. At $3.25 billion, Genpact is the most valuable Indian BPO firm by market capitalization.
The BPO firms have grown admirably in the last few years, but now they need to focus on productivity improvements, an analyst said. “The margins pressure due to currency appreciation will continue in the short term. There is definitely room for efficiency improvement further to mitigate these pressures,” said Nitin A. Khandkar, senior vice-president for research at Keynote Capitals Ltd in Mumbai.
Indian BPO companies are hedging rupee against the dollar against currency fluctuations, besides increasing prices for contracts with customers. “It is a no-brainer that currency appreciation has a hit on margins. But companies have found a way through hedging, internal efficiencies and getting better rates for new orders,” said Neeraj Bhargava, CEO of WNS. The firm, which went public last October, declined further comment ahead of its quarterly results announcement on 16 August.
Another factor that will aid investor interest will be the ability to scale up to meet rising demand for back-office services from India, said another analyst. “The opportunities are huge and those who can scale will grow faster,” said Madhu Babu, equity analyst with Mumbai’s Finquest Securities Pvt. Ltd. “Large companies have a natural hedge due to their scale. They have the operating leverage to handle the rupee fluctuations.”
India’s BPO industry reported revenues of $8.4 billion for the year to March, and these are expected to grow annually by more than 30% to touch $20 billion crore by 2010.
Firstsource Solutions was one BPO firm that exceeded average industry growth by a large margin. The company, listed on the stock exchanges in India, beat market expectations with a 232% net profit growth in the April-June quarter to Rs44.3 crore and a revenue expansion of 75.2% to Rs282.15 crore. Its margins at 21.2% were ahead of the industry margins too, Finquest said in a 31 July note.
Keynote Capitals’ Khandkar said Indian companies should also do more work such as financial analytics and research to move away from “labour arbitrage” work, which faces competition from firms in the Philippines and China.
Tech research firm Gartner Inc. called Indian BPO firms’ achievement so far “the first wave”, which, to be sustained, needs more focus. “Many Indian companies are talking about transforming customers’ business model. The focus (rather) should be on offering the best in what they expect,” said Ben Pring, vice-president (research) at Gartner.