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BPOs: Testing times?
Nov 6, 2007

The Indian BPO services sector has been under severe pressure of late largely due to the rupee’s appreciation against the greenback. This is because such companies earn a substantial part of their revenues in US dollars (almost over 95%) and the cost is entirely in rupee terms. With appreciating rupee, while BPO companies are no doubt growing in US dollar terms, the growth in rupee terms has taken a beating. Over that, there is pressure on margins on account of wage hikes and higher service tax on lease rentals. However, seeing by what managements of IT services companies (also offering BPO services) have been doing in recent times (increasing shareholding in their BPO outfits), there are indications that the companies remain confident of the BPO potential. The latest one to join this bandwagon is Satyam, which has recently bought out the minority shareholders in its BPO subsidiary, Nipuna for Rs 51 m. In this article, we take a look at how Nipuna, now called Satyam BPO, and its larger peer, Wipro BPO, have performed over the years and what are the future prospects.

Satyam started its BPO services in FY03. Currently, it offers services like CRM, finance and accounting, human resource operations and knowledge process outsourcing through the BPO arm, which contributes to around 3% of its consolidated topline. Over the past four years, the company has managed to scale up this segment. It has 6 delivery centres to service its BPO clients (4 in Hyderabad and 1 each in Bangalore and Chennai) and has a seating capacity of 5,000 people as at the end of FY07.

On the other hand, Wipro BPO (earlier Spectramind) was initially promoted by HDFC but now it is entirely held by Wipro Ltd. The company had bought 20% stake in Spectramind in October 2001 and it increased it to 100% by January 2003. It offers services in call centre operations and industry administration services. The BPO unit currently has 8 centres in India and 1 international centre in Romania.

  Satyam BPO Wipro BPO
  Employees Revenues (Rs m) PBT (Rs m) Employees Revenues (Rs m) PBT (Rs m)
FY04 1,367 109 (193) 9,300 4,374 1,058
FY05 1,639 446 (372) 15,300 6,523 1,206
FY06 2,825 886 (331) 16,080 7,627 1,058
FY07 2,916 1,717 (170) 17,464 9,391 2,157
Source: Annual reports

Things looking up
FY07 was an encouraging year for both Satyam BPO as well as Wipro BPO. In case of Satyam BPO, the company recorded a 91% YoY growth in revenues in dollar terms and more importantly was positive at the EBITDA level. Satyam expects the BPO business to ramp up fast going forward, as is evident from a strong guidance of 60% YoY growth in revenues in dollar terms for FY08. The company is currently working on more than 63 processes and services above 33 clients in this space. In the past four years, Satyam BPO has grown its revenues at a CAGR of 151%. Readers should note that this growth has come on a very smaller base.

As for Wipro BPO, the company recorded a 23% YoY growth in revenues and 104% YoY growth in profits in FY07. Wipro generates over 6% of its revenues from the BPO space and is an established player when compared with Tier I IT companies’ BPO offerings. In the past four years, Wipro BPO has grown its revenues and PBT at a CAGR of 29% and 27% respectively.

Road ahead for BPOs
While the pressure from rupee appreciation, talent crunch and MNC competition shall continue for the smaller BPO companies in India, we believe that the way forwards for BPOs of IT services players (like Satyam, Wipro and Infosys) will be different. One of the key reasons these companies have ramped up their stake in respective BPO arms is to provide clients with a common interface, where they plan to offer integrated IT and BPO services. This is because most of the offshored IT service contracts also have some amount of BPO content. As such, rather than letting go the BPO part to a third party vendor, Indian IT majors are trying to ramp up their presence in the BPO space to earn a larger share of the clients’ IT spend. This, we believe, shall be a long term positive for these companies. As for the third-party BPOs (especially the smaller ones), shutting shop or merging with bigger players are the two options they have in front of them.

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