Late last week, Firstsource Solutions Ltd announced that it will take over a US-based call centre from Barclays Plc. This translates into a large-sized $80 million (Rs316.8 crore) deal spread over five years. The markets, however, weren’t too excited. Firstsource shares gained just 1% on a day IT shares rose by 3% thanks to the positive outlook given by Cognizant Technology Solutions Corp. Firstsource has now corrected by 39% from its recent highs, compared with a drop of 19% in the CNX IT index. What gives?
While the deal will undoubtedly aid growth and further reduce the possible impact of a rupee appreciation, it increases the company’s exposure to the slowing US market. As one fund manager puts, IT and BPO service providers are “sitting closest to the bomb”, referring to the high possibility of a US slowdown.
Firstsource has steadily increased its exposure to the US through acquisitions and took a giant leap in this regard when it acquired MedAssist Holding Inc., a US-based provider of revenue cycle management services for the health-care industry for $330 million last August.
The company’s results for the December quarter show the perils of having a large exposure in the US. A sizable chunk of revenues comes from handling collections against credit cards, auto loans, telecom payments and health-care payments. US consumers have started defaulting on even these payments, which reduced the revenue and profit for companies such as Firstsource, since their revenues are linked to the amount of collections.
As a result, the organic business last quarter remained more or less flat at second quarter levels. The management, however, is upbeat about the long-term prospects of the business, citing that the function of loan collections would increase in time due to an increase in defaults. For now, though, business has been impacted.
This is not to say that the company should avoid deals in the US. It’s just that the markets seem to be cautious about a high exposure to the slowing economy.
Metal price spike due to one-off factors
Metal prices are rising once again. The Economist commodity price index has gone up from 244.2 on 1 January to 263.2 on 5 February, up 7.8%. Copper prices are at a three-month high. What’s going on?
Surely, if the US is sliding into a recession or into a severe slowdown, as all the data seem to suggest, metal prices should be falling rather than rising?
The rebound in metals has led some metal bulls to come out of hiding and proclaim that growth in India and China will offset weakness in the US. Their argument is that most of the incremental demand is coming from Asia and that will ensure high metal prices.
But, a look at the historical data doesn’t seem to bear out that view. Even with the recent bounce, The Economist’s metals index is still down 14% from the 300 plus highs it reached last June. Analysts say that the current spike in base metals prices is simply the result of lower inventories, weather-related supply disruptions in China and rising power costs due to the higher price of coal. They also argue that much of the demand from China is derived demand, the result of exports to the US. With the slowing US economy, export demand too will fall.
Interestingly, the MSCI Barra sectoral indices show that the year to date returns from the world’s metals and mining stocks is down 5.4%. Emerging markets metals stocks are down even more at 7.4%. But the three-month returns are even worse, implying some amount of bounce from their lows. In India, metal stocks have done far worse, with the BSE Metal index falling 24.8% from its January opening, compared with a fall of 14.1% for the Sensex. That’s despite the presence of large steel companies in the metals index. Analysts say that the prices of long steel products could diverge from that of base metals because of the continuing infrastructure boom. That’s why, despite the slowing US economy, steel prices have been maintained in that country. The spike in base metal prices, however, could prove to be short-lived.
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