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Sunday, June 24, 2007

Blackstone deal validates Indian BPO industry’s strength- Kamath

The acquisition of Intelenet by private equity giant Blackstone signals a new era for the outsourcing industry, according to Mr Prakash Kamath, Principal Consultant, PricewaterhouseCoopers.

Speaking to Business Line on the largest management buyout deal in the country so far, he said: “The BPO industry has for long been hailed as the ‘sunshine’ sector in India. It would be apt to say that this industry is now delivering to its potential.”

The deal comes as a shot in the arm for the sector, which has been seeing turbulent times due to the falling dollar, increasing employee costs and constant depletion of skilled personnel, he added.

The value of the deal is said to be in the region of $200 million (Rs 820 crore). Blackstone recently raised $4.13 billion in the biggest US IPO in five years, selling 12.3 per cent stake, which values the company at $33.5 billion.

Stating that the presence of Blackstone in the deal is testimony to the strength and the potential of the Indian BPO industry, Mr Kamath said that it is also a pointer to the emergence of private equity in India.

“Private equity investors from around the world – including big-ticket players like Carlyle Group, General Atlantic Partners and the UK’s Actis Partners – are increasing their bets on Indian corporate houses or making new ones.”

He added that domestic firms such as ICICI Venture Funds and Kotak are also stepping up investments. “It would not be surprising to expect more such deals in the future.”

The export-oriented IT and ITES industry in India has been conservatively valued at generating revenues of $15 billion.

It has consistently grown by about a third every year and more than a million people are currently employed by it.

However, ever since the rupee began its upward march, gaining by as much as 10 per cent against the dollar, BPO firms have taken a big hit.

“Suppose a BPO firm functions at an operating margin of 25-20 per cent. For this firm, the drop in operating margins would be a massive 40-50 per cent, assuming that all revenues are in dollars and there is no hedging,” Mr Kamath said.

He added that the top-tier companies of the industry would be able to tide over these times thanks to access to easier finance and labour.

“As for the smaller players, it has been seen that they are either finding financing partners with multimillion dollar pockets to fund their expansion plans or are being acquired by larger BPO firms or IT firms with BPO aspirations.”

Dwelling on the dynamics of the BPO industry, he said: “Most companies start off with one major client (for instance, Intelenet-Barclays) or as a captive unit (like Genpact-GE). In the next step, the client acquires a major stake in the BPO. As the last step of the cycle, the client divests from the BPO operations at a profit. All along, the client relationship remains active.”

Intelenet is India’s third largest BPO firm by headcount, with a base of around 17,000 employees spread over 18 locations in India and overseas.

The company was started as a 50-50 joint venture between TCS and HDFC in 1994. In 2004, TCS sold its stake to HDFC, which subsequently sold it to Barclays the same year.

The firm is reported to have revenues of Rs 380 crore with an asset base of Rs 410 crore.

“Its operating margins are around 15 per cent, significantly lower than the BPO industry average. It is also worth noting that currently, 70 per cent of its revenues are generated from Barclays.”

2 comments:

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