| Genpact IPO: G for top Gear? |
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| Monday, 13 August 2007 | |
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Genpact (NYSE: G) successfully completed a listing on the New York Stock Exchange, raising $494.1 million.
Genpact (NYSE: G) successfully completed a listing on the New York Stock Exchange last week, raising $494.1 million, with each share priced at $14. It now joins the elite club of listed Indian pure-play BPO firms that includes rivals WNS (NYSE: WNS) and EXL Service (Nasdaq:EXL). Genpact, formerly GE Capital International Services (GECIS), started out as the captive arm of General Electric (GE). The company became a third party service provider in 2004 when GE sold 60 percent stake to private equity firms Oak Hill Capital Partners and General Atlantic, and was renamed Genpact. With its strong lineage and aggressive growth strategies, the company has become the largest BPO provider in India in terms of revenues (About $613 mn in 2006). Genpact (GECIS at that time), pioneered the offshore business process outsourcing services business through its mailroom service offerings, and soon built up wide ranging capabilities from finance and accounting to analytics. Its 30,000 strong workforce spans locations such as China, Mexico and East Europe, with a large senior management team in the US, from where it derives maximum business.
IPO performance expectations from the Indian leader were very high. Genpact’s initial offering was expected to be in the range of $16 to $18. But adverse market conditions and volatility in the US markets forced the company to revise its expectations to $14 a share, mopping up $494.1 million in total. This was higher than EXL Service’s $12 per share but much lower than WNS’ $20, although Genpact is larger in size than both these companies. The valuation of 5.3 times sales revenue is however, higher than EXL’s initial 4.89 and WNS’ 5 times. Genpact’s share demonstrated strong aftermarket gain (closing at $16.75) on the day of the listing following the lowering of the IPO price. This led to some speculation on the extent of ‘optimal’ discount. Priced at the top end - of $18 per share - the IPO could have raised over $700 million. There were some other concerns too. About half the earnings from the IPO will go to investors. General Atlantic and Oak Hill Capital Partners sold their stake in Genpact, along with GE, which diluted its holding by 5%. GE still holds close to 23% stake in the company, and accounts for three-fourths of Genpact’s existing clientele. While this promises a steady stream of revenues, diversifying the client base in future will drive up the company’s marketing costs. It may also discourage GE’s competitors from using Genpact’s services. The relatively lower operating margin of 9 percent is also a worry going forward. Companies such as EXL, WNS and now Genpact are setting a good precedent to the aspirations of the Indian business process outsourcing industry (all three stocks are trading above the IPO price currently, with a combined market capitalization of around $5 billion), although global uncertainty may slow down some potential listings. As the cost arbitrage is reducing with the rise of competing offshore destinations such as the Philippines and China, and competition tightens, there is a certain amount of pressure on Indian companies to stay strong in the game. Scale and geography will become two key elements of being able to stay in the fray. Right now, Genpact seems to be well poised on both fronts at the moment. However, growing recognition among buyers apart, there is still no holistic Indian competitor to the likes of IBM, Accenture, Convergys, etc. The listing spree by Indian BPO companies is sure to deliver much needed funds, global presence and buyer participation, which will likely to strengthen the case of the Indian outsourcing industry abroad. Consolidation, which is sure to follow industry maturity, will also be hugely benefited by the availability of funds. While the newly listed companies scout for acquisitions, they themselves are also likely to be attractive acquisition targets for the aspirations of global giants. ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities. No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited. ValueNotes Outsourcing Watch articles are distributed through FinancialWire, an independent, proprietary news service of Investrend Information, www.investrend.com Related Items: |
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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