While traditionally the Indian BPOs have expanded from India to the US and other geographies, HOV Services has done exactly the reverse.
| Ticker | Bombay:532761.BO | | Market Price (03 Oct 06) | 173.10 | | Volume | 36,379 | | Primary business focus | BPO service provider (Finance and accounting) | | Location | Pune, India (2 centers); San Jose, Antioch, US (2 centers) | | Employees | Total - 785 | | Revenues | $1.04 mn for 2006 | Background HOV Services was incorporated in 1989 as Codec Communications Private Limited by Anil Rajadhyaksha and Sunil Rajadhyaksha. In the year 2002, the company shifted its focus from IT to ITES. With offices in India and US, the company currently provides finance and accounting (F&A) services to its US based clients through three business divisions: Account Receivable Management (ARM), Enterprise Management Tools and Services (EMTS) and Insurance and Tax related services.
- The ARM division provides customer care outsourcing, early and late stage bad debt collections and insurance eligibility verification, billing and follow-up to clients in the telecommunications, healthcare and financial services verticals.
- The EMTS division develops proprietary software products for use by its clients and by other operating business divisions.
- The ITS division offers consulting and project management services to the surety industry focused primarily in the construction sector and property tax assessment management and consulting to the healthcare and other industries.
Financials | Particulars ($ mn) | FY02 | FY03 | FY04 | FY05 | FY06 | | Revenues | 0.21 | 0.15 | 0.45 | 1.12 | 1.04 | | Expenditure | 0.18 | 0.16 | 0.39 | 0.49 | 0.43 | | EBIDTA | 0.03 | (0.01) | 0.06 | 0.62 | 0.62 | | EBIDTA Margin (%) | 13.45 | (4.53) | 13.49 | 55.63 | 59.05 | | PBT | 0.02 | (0.01) | 0.06 | 0.60 | 0.59 | | PBT Margin (%) | 11.18 | (6.87) | 12.68 | 53.89 | 56.28 | | PAT | 0.02 | (0.01) | 0.05 | 0.59 | 0.59 | | PAT margin (%) | 8.41 | (4.26) | 11.20 | 52.90 | 56.13 | | EPS | NA | NA | 0.02 | 0.20 | 0.13 | Source: Company prospectus, ValueNotes Research Although the company’s sales and profits have grown at a CAGR of 50% and 141% over the past five years, the total revenues have declined in the fiscal year ending March 31, 2006 relative to FY05. EBIDTA, PBT and PAT have remained flat in FY06 as in the previous year. This can be partly explained by the fall in operating expenses. However in an industry that is experiencing y-o-y 35 to 40% growth, such flat figures do not speak highly of the performance. More so when the company has an early mover advantage - (since 2002). Further, the staff cost has decreased over the last year by 28 percent indicating a high attrition. Revenue break-up by service type | Business Lines | 2002 | 2003 | 2004 | 2005 | 2006 | | ARM (%) | - | 0.76 | 25.21 | 45.71 | 45.21 | | EMTS (%) | 100 | 99.24 | 53.06 | 22.26 | 12.50 | | ITS (%) | - | - | 21.73 | 32.03 | 42.29 | Source: Company prospectus The change in ratio (drop in EMTS segment) is due to the acquisitions in the ARM and ITS space. Currently, ARM remains the primary focus of the company’s BPO business. In keeping with the KPO (Knowledge Process Outsourcing) trend in the industry, the company included insurance and tax research in its service offerings. Interestingly, the share of revenues from this segment doubled in 2006 considering only 20% of the manpower is located in India. This equation is not likely to change drastically in this fiscal with ARM, EMTS and ITS at 47%, 11% and 41% respectively. Going Forward... With growing outsourcing opportunities and addition of clients, we expect increase in the total revenues in the current fiscal. Strong domain expertise in the F&A space is the company's key strength. The company also sees potential in cross-selling its products among its existing clients to propel growth. The company needs to address certain concerns carefully: - Dependence on a single market (US)
- Dependence on few big clients. In FY06, 10 large clients accounted for 70% of its revenues. Loss of or reduction in business from a single client will significantly affect revenues.
- High attrition (almost 40%)
While traditionally the Indian BPOs have expanded from India to the US and other geographies, HOV Services has done exactly the reverse. Hence, managing people issues in India may prove to be a challenge given their relative inexperience compared to peers. Further, as the company plans to expand, it will need to build a strong middle management team. | Face to face with Karan Negi, COO, HOV Services | | | | | About HOV Services: HOV Services Limited was incorporated in 1989 as Codec Communications Private Limited by Anil Rajadhyaksha and Sunil Rajadhyaksha. We started our BPO journey in 2003 with the expansion our Pune delivery center. We provide BPO services in the Finance and Accounting Sector to clients in the medical, telecommunications, financial services and insurance industries. The name of the Company was changed to HOV Services Private Limited on February 27, 2006. Key differentiator: We perform services that mitigate the risk of loss or erosion of financial assets for our Fortune 500 clients. We are a major player in the ARM 3rd Party collections space in India. We have the early mover advantage! F&A is an addressable market of $20-25BN as per Nasscom. Success in this sector depends on establishing and maintaining the trust of clients who outsource the servicing of core, strategic functions to us. We have established long, successful relationships with our clients some of which date back more than 8 years. Competition: In the ARM space, we compete with US-based NCO group and OSI. Closer home ICICI OneSource and Genpact have collections operations. In the Insurance & tax segment we compete with Navigent, a US based company. Issues/Challenges: Retaining skilled workforce is a challenge. Annualized attrition is approximately 40% at agent levels. Maximum people leave because of the inability to deal with stress arising from night shifts. We provide opportunities to our employees to work day shifts in our Pune facilities since a significant part of our service involves research, location and verification and other F&A functions. We have not witnessed any attrition at senior levels, both in U.S and India. In fact, founders of acquired companies to date perform key management functions. Future plans: We plan to continue our focus on the US market and participate in the growth of our Fortune 500 client base. However increasing M&A across geographies amongst our target customers means that Europe may be inevitable in time to come. We plan to add capacity for an additional 1,500 employees in three phases. In the past, we have grown through acquisitions. Going forward, acquisitions will be opportunistic and will complement our present service offerings. |
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ValueNotes’ research indicates that the domestic BPO industry stands at an inflection point, with the growing scale of Indian buyers as well as the emergence of significant vendors with greater capabilities