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BPO sector may witness a few IPOs next year

Vipin V. Nair

New Delhi , Nov. 20

SOME of India's business process outsourcing (BPO) companies may go public next fiscal as their revenues swell to a critical size, costs are well controlled and profits surge.

Top tier BPO companies, which employ thousands of people and work for Fortune 500 clients, have managed to stabilise their billing rates and improve profit margins, despite perpetual problems such as large scale attrition and cut-throat competition.

Industry observers say that Delhi-based EXL Services and Daksh eServices are most likely to come out with initial public offers over the next 12-18 months as revenues of these companies are set to cross $ 50 million next year, with healthy profits. Of course, their plans would hinge on the mood in the market then.

EXL and Daksh employ about 3,000 and 5,700 people respectively and are growing rapidly.

Being listed on stock exchanges would help them use their shares to buy other BPO firms to scale up faster. Their stock options to employees will also look far more attractive if they are listed, and help reduce attrition.

EXL's President and CFO, Mr Rohit Kapoor, told Business Line that his company would look at an initial public offering (IPO) after its turnover crosses $ 50 million. "This year we will be $ 28 million-30 million (in revenues) and we are expecting a 100 per cent jump next year," Mr Kapoor said.

While smaller BPO firms continue to battle diminishing billing rates, rising costs and pressure on margins, larger firms are witnessing a great deal of stability in their business, signifying that boys are finally separated from men.

"The better managed BPO companies have been able to squeeze significant cost advantages from leveraging economies of scale, passing on more start-up expenses like transition management, training, technology set up etc to clients and actually reducing salaries of freshers and trainees," says Mr Arjun Saxena of Inductis, a management consultancy.

He cites the example of two large BPO firms whose wage costs `had stayed virtually flat over the last 15 months' while the transport/fleet management costs declined by 15 per cent. Mr Kapoor of EXL says entry-level salaries have not risen by over five per cent while overall costs have gone up only by two-three per cent.

"But telecom costs have come down and this has in a way offset the cost structure," he said.

According to Mr Raman Roy of Wipro Spectramind, margins in the BPO business would settle at 18-21 per cent provided companies manage their business well. "We have a seat utilisation of 1.8 times and we are striving to take this upwards," he said.

A profit margin in the region of 20 per cent is indeed respectable on top of surging revenues, especially since it is three times to what US-based BPO firms enjoy, Mr Saxena said.

"Also, valuations are driven by profit margins as well as growth expectations and so long as revenue growth projections are rosy, they will make up for lower margins and still sustain higher market cap/valuation," he noted.

At the time of going public, companies such as Daksh and EXL, should not have any problem in attracting a P/E of around 35 when compared to a P/E of 25 that Convergys, a US-based leading BPO firm, enjoys, Mr Saxena says.

"In the US, Wipro and Infosys have P/Es of around 45 (this corresponds to a 25-30 per cent net profit margin, growing at a 30 per cent plus compounded annual growth interest for over 5-7 years). We believe that these benchmarks constitute the end-points for the expected range of P/E multiples — most debuting BPO companies should show a lower net profit margin and a higher revenue growth rate projection than Wipro/Infosys when they IPO," he says.

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