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ShareMumbai: Bank of America Securities-Merrill Lynch has cut the growth outlook for the pure-play Indian BPO sector drastically.
Pointing to factors such drop in business volumes and bankruptcies among clients, besides an overall pricing pressure and competition from integrated players, the firm cut profit estimates by as much as 55% in some cases.
"We forecast CY09/FY10 US$ revenue growth of 0-9% for WNS, Firstsource and Genpact and a decline of 5% for EXL. This is much lower than the growth we expected a few months ago, with deal closures getting delayed due to clients' uncertain business outlook. We believe protectionism worries could also result in deals getting pushed out," the firm said in a note titled 'The Indian BPO Sector' dated April 14.
"Clients' reduced business impacting BPO volumes in discretionary services such as analytics/advisory services (around 20% of EXL's revenue and at least 10-15% of WNS's and Genpact's revenue) or customer care services in banking, insurance, airlines and telecom," it said.
It also said that mergers, acquisitions and bankruptcies have seen many clients disappear from the Indian BPO firms' radar. "First Magnus, a greater than 5% revenue client for WNS, filed for bankruptcy in 2007. Wachovia, a likely 4-5% revenue client of Genpact, was acquired by Wells Fargo last year, and we expect business volumes for Genpact to be impacted given Wachovia's business and integration challenges," the report said.
The brokerage expects WNS to fall short of its earlier estimate for revenue for the last financial year by 9% while Genpact and Firstsource, two other standalone BPO companies, are expected to perform inline as of 2009.However, even as it cut down its estimates, BofA-ML expects revenues to remain flat or even slightly higher in the current year and grow by 10-15% in FY 2011, led by Firstsource.
Meanwhile, industry agreed with the view that overall growth is likely to remain flat in 2009. "I do not believe that the troubles are something that will affect only the stand-alone players or only the integrated players," said Deepak Ohlyan, president of Business Process Industry Association and Director for India Facilities at Dell International Services. "That said, we expect growth to remain flat this year," he said. Many BPO industries in India had been growing at scorching rates of 25-40% for many years now.
Kanwaljeet Singh, a partner with the India-based venture capitalist firm Helion Ventures, believes there are still some islands of very high growth in the BPO sector. Helion invests in IT and IT-enabled industries like BPO. "We are still investing in BPO. We are still open to opportunities from it," Singh said. He pointed out that even as the overall sector remains static, certain areas were booming.
"One example I can immediately give is that of one our companies, United Lex. It's into legal process outsourcing. And because of the recession, a lot of corporates and law firms in the US are more open to talks with it than before. Whether it actually results in increased revenues is yet to be seen," he said.
While BPO companies, like IT services firms, could have reaped a windfall due to the weak rupee, Merrill said most of the BPO players have hedged their revenues against currency movements, taking away some of the beneficial impact.
"Since BPO companies typically hedge for longer periods than IT companies, given the longer-term nature of BPO contracts, we fear margin benefit is being offset by hedging losses," it said.
