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We are initiating a quarterly financial analysis of 5 listed BPO stocks with significant Indian operations. While 3 of them (WNS, EXL and Genpact) are listed in the US, the other 2 (HOV and Firstsource) are listed on the Indian bourses.
Source: Yahoo finance, Company website
The financial results for the quarter ended March 2008, reflect the pains that these companies are facing as a result of the global economic slowdown and financial crisis. Also, they were impacted by Rupee appreciation against the Dollar in the quarter. Hence, there was only a marginal revenue growth for the March 2008 quarter for all 5 companies. Interestingly, the EBIT margins for Genpact and HOV witnessed wide deviation qoq, while there was only a marginal change for the others.
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Firstsource
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WNS
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EXL
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Genpact
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HOV Services
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Quarter
ended
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Dec 07
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Mar 08
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Dec 07
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Mar 08
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Dec 07
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Mar 08
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Dec 07
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Mar 08
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Dec 07
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Mar 08
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Op. revenue
($m)
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89.0
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89.4
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115.6
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116.1
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50.4
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50.9
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231.6
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234.4
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49.7
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47.0
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QoQ growth
(%)
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0.5
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0.4
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1.1
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1.2
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(5.4)
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Total
revenue($m)
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91.1
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90.3
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117.7
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118.3
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50.4
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50.9
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231.6
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234.4
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49.7*
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47.0*
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EBIT ($m)
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10.3
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10.3
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7.2
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7.5
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7.5
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6.9
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31.1
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24.0
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3.3
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2.4
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EBIT (%)
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11.4
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11.4
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6.1
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6.3
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15.0
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13.5
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13.4
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10.3
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6.6
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5.2
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Source: Company filings, ValueNotes research
* Total revenue of HOV services excludes other income of $1.9m (Dec 07) and $8.4m (Mar 08)
Firstsource
Slow organic-revenue growth, as Medassist revenues made up the bulk (~40%) of quarter revenues (boosting the health care vertical’s revenue contribution by 20% in FY08)
Interest expenses increased by 9% qoq, which affected net margins.
The company has given guidance that the operating EBIT% for FY09 will be similar to or slightly below FY08 levels with some qoq volatility.
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FSL
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WNS**
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EXLS
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G
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HOVS
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Avg staff
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17,369
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15,084
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10,000*
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32,600
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12,400
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Attrtn %
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38.9
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43.0
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38.2*
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30.0
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NA
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Client Conctrn
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31.2% (Top 5)
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55.2% (Top 5)
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46.0% (Top 2)
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49.0% (GE)
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31.0% (Top 5)
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Highest revenue vertical
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Health Care 39.8%
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BFSI 61.8%
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Insurance
-
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Mfg 42.1%
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Health Care 39.4%
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*31st Dec 07 figures
** 31st Mar 07 figures
Source: Company filings
WNS
EBIT margins recorded a small increase of 0.2%.
WNS has revised its revenue guidance for FY09 to be in the $425m - $435m range which is ~14% higher than its original guidance. It has indicated that the overall operating margin would be several percentage points higher post the AVIVA deal.
However, the debt funding for its recent acquisition is likely to limit Balance Sheet flexibility and raise interest costs.
Source: Company filings
EXL Services
Qoq revenue growth of 9.5% in the transformation business was offset by the adverse impact of the depreciating British pound, and this resulted in a marginal 1.1% qoq increase in total operating revenue.
Start up costs on the new facility in Philippines coupled with unfavorable exchange rate impacted operating margins in the March 2008 quarter, which fell from 15% to 13.5%.
Source: Company filings, Yahoo finance, Moneycontrol
Genpact
EBIT margins reduced from 13.4% to 10.3% primarily on account of higher depreciation and amortisation that included a one time write-off of $3.3m towards software licenses.
The EBIT includes forex gains of $15m (Dec 07) and $22m (Mar 08) which the company claims are linked to long term cost hedges against increase in cost of revenue and other operating expenses due to the appreciation of the Rupee. Should the forex gains be excluded from EBIT the margins would be reduced to 7% (Dec 07) and 0.7% (Mar 08)
HOV Services
Operating revenue were lower by ~5% qoq.
Operating margins have reduced marginally from 6.6% to 5.2%. While computing operating margins we have not considered other income of $1.9m (Dec 07) and $8.4m (Mar 08), as we believe that it is an extraordinary gain from a one off transaction. If other income were included the operating margins would be 10.0% (Dec 07) and 19.5% (Mar 08).
Valuations continue to be high, given business uncertainties
The PE of all companies still appears high. Though the June quarter numbers will be better given the Rupee depreciation in the recent past, this will just about compensate for poorer top-line growth and rising wages.
Despite many claims to the contrary, cost arbitrage continues to be the primary driver for all outsourcing buyers Wage inflation therefore is a serious concern, especially given the competition and the rising domestic demand for talent in India.
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FSL
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WNS
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EXLS
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G
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HOVS
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Share Price
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33.8
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17.8
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16.4
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13.1
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117.5
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Listing
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NSE
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NYSE
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Nasdaq
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NYSE
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NSE
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M cap ($m)
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343
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757
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471
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2,780
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36
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PE
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24.5
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81.2
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16.9
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45.5
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28.9**
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EV/ EBITDA
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11.8
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137.3*
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16.8
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15.9
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1.9
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Market cap to sales
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1.1
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1.7
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2.5
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3.2
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0.2
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Note: Ticker symbols for the stock in respective exchanges are mentioned as headers for each stock. Share prices as on 24th July 08
FSL=First Source; EXLS=EXL Services; G=Genpact; HOVS=HOV Services
* represents EV/EBIT as EBITDA is not available
** Earnings do not include other income
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