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Call centres: Look before you leap - Views on News from Equitymaster
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  • Mar 18, 2002

    Call centres: Look before you leap

    The recent interest in the software stocks has been based on the ‘call centre play’. Expectations of steep growth have caused buying interest in stocks like Mphasis BFL and Hinduja TMT. While Mphasis BFL has projected a 200% growth in revenues for FY03 from its call centres business, Hinduja TMT (that was known as Hinduja Finance) plans to double its employee strength from the current 600 to 1,200 by June 2002. All of this seems very enticing but be very careful before you, as a retail investor, make your choice.

    Firstly, all the growth that these companies are projecting is on a very small base. Hinduja TMT had revenues of Rs 396 m in 9mFY02. In MphasiS’s case MSourcE, the company’s call centre subsidiary had revenues of Rs 58 m (7% of revenues) for the quarter ended December 2001. Another cause for concern is that of client concentration. MsourcE has about eight active customers. While the details are not available, the number of clients is likely to be lower for Hinduja TMT. In September 2001, Hinduja TMT had received orders from a telecom related company, which was expected to run into Rs 3 bn over a period of three years. The loss of this client could impact the financials of the company adversely.

    While high client concentration and low base of revenues are company specific concerns. Let us take a look at concerns at a more macro level. The concerns are possible over capacity and lack of quality leading to a decline in business flow to the sector. In FY01, the revenues from customer interaction services (call centres and customer support centres) grew by 112%, according to Nasscom. The total earning from this segment was estimated to be Rs 9 bn (US$ 185 m). Customer interaction services accounted for 21% of the total revenues from the IT enabled services sector, which were Rs 41 bn (Rs 818 m) in FY01.

    The rapid growth rate in this segment has attracted a significant number of players. The list includes GTL (Global Tele), Intelenet (a HDFC and TCS joint venture), IT&T and E-Serve (HCL Technologies subsidiary) to name a few. The rush to make most of the boom could lead to over capacity. Over capacity is likely to lead to a pricing war. This means that margins will be under pressure. With low margins survival would depend on volumes, where size would be critical.

    With barrier to entry being low a lot of smaller players are also offering call centre services and there is no way to keep a check on quality. Let us draw a parallel with our experience in a related area. When business started to flow from abroad everyone jumped into the medical transcription business. These players were inexperienced. The human resource was not qualified enough to meet the business needs, as a result the quality suffered. Consequently, new business started to come in at a lower pace. With business evaporating this in turn put pressure on the realisation of companies and they found profit suffering. As a result the growth of the industry suffered. The contribution of the transcription segment to the total revenues of the sector declined from 11% in FY00 to 3% in FY01. However, there was growth of 33% even in this segment.

      Mid 1999 End 2000 Change
    Medical transcription centres 1,400 70 -95%
    Medical transcription training institutes 200 40 -80%

    Source: Itspace.com

    Further, we have neighbors that can beat us in cheap labour any day. Where they lose out is the knowledge of English language. But that is not a very difficult skill to acquire and they might pose serious competition especially in low value add areas like call centre business.

    Coming to the positives for the IT enabled services sector, the cost of bandwidth will certainly reduce in future and low cost availability of human resources is likely to continue. These factors would stimulate growth of the IT enabled services industry in the country. Large corporates like Infosys, Wipro and HCL Technologies that have successfully managed growth will probably make the most of this opportunity. What these companies know is how to manage people successfully even when the number of employees grows from 200 to 10,000.

    After all, the IT services business is nothing but selling ‘man-hours’. It is not magic that for FY01, the contribution to the total revenues from each segment of IT enabled services is almost the same as the percentage of total employment in each segment. Thus, IT enabled services could bring back the lost zeal in the growth rates of top rung technology companies. But while investing in stocks like Hinduja TMT based on the ‘call centre play’ be very careful.



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