Shares of business process outsourcer WNS (Holdings) Ltd jumped by about 22% on the New York Stock Exchange after a report in The Economic Times newspaper that private equity (PE) firm Warburg Pincus is looking for buyers for its 50.12% stake in the company.

According to the report, investment banking sources said the PE firm’s stake was worth $400 million (around Rs1,916 crore), putting the firm’s valuation at around $800 million.

Before the news hit the markets, WNS had a market capitalization of $543 million, which represented a jump of 3.8 times compared with the valuations in early March. True, valuations had reached unreasonably low levels in early March, and most stocks have rallied smartly since. But if the stake sale is indeed done at a firm valuation of $800 million, that would represent a gain of 5.6 times since early March.

Other India-based technology outsourcing firms stocks, including industry leader Genpact Ltd and ExlService Holdings Inc., have gained by about two times from their lows in March.

But based on its non-GAAP (generally accepted accounting principles) earnings, WNS’ valuations would be pretty similar to those of Genpact even at the rumoured deal price of $800 million. WNS expects non-GAAP earnings of $52 million in the year ending March 2010. Non-GAAP earnings are derived by adding back the following expenses to reported earnings computed under US GAAP accounting: impairment of goodwill and intangible assets, share-based compensation expense, fringe-benefit tax and minority interest.

Ahmed Raza Khan / Mint

At the reported valuation, WNS will be valued at 15.4 times non-GAAP earnings. Genpact, which has a market capitalization of $2.7 billion, is likely to report non-GAAP earnings of about $180 million in the year till December, resulting in a valuation of 15 times.

The WNS management also reiterated its guidance for the year and its June quarter results were well received by the markets. On the other hand, Genpact lowered its revenue targets and was punished by the markets last week.

More importantly, WNS expects to maintain its free cash flow generation of about $5 million a month in the June quarter, which translates into a yearly cash generation of $60 million. On an expected revenue base of $390 million, that would mean a free cash flow to sales ratio of over 15%, which is a very healthy number.

Considering that Genpact operates at about three times the size of WNS in revenues, one would normally expect it to also enjoy a valuation premium. Indeed, before the news of the possibility of a majority stake sale, WNS was valued at only around 10 times estimated non-GAAP earnings, a significant discount to Genpact.

But since a controlling stake is available for grabs—according to another story by The Economic Times, another shareholder is likely to offload its 12% stake along with Warburg Pincus—interested firms may be willing to pay a premium.

But as far as minority shareholders go, the excitement surrounding the stock currently may be a good opportunity to book profit, since valuations are already rich and growth is expected to be unexciting in the medium term. In the June quarter, WNS’ organic revenues were flat after adjusting for acquisitions.

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