As outsourcing firms lose their cutting edge, BPO stocks shed their sheen

India-based Business Process Outsourcing companies are taking away US jobs and are recruiting by the thousands. But why are listed BPO stocks doing badly and what is their long-term future?

The US is reeling under high unemployment, which is often blamed on India's Business Process Outsourcing (BPO) sector, which is accused of pulling out jobs from the US to India.

That should mean great business for BPOs, right? Well, BPOs remain one of the largest employers and highest-paying sectors in the country. But why do their stocks continue to provide dismal returns on investment?

In January 2008, the Sensex was at over 21,000. It then crashed and almost regained its previous peak by October 2010. During this period, Allsec Technologies Ltd is down by a jaw-dropping 72%, Firstsource Solutions Ltd has fallen by 67%, while Tricom India Ltd has plunged by 65%.

Similarly, others like Cambridge Solutions Ltd went down 45% and Spanco fell 33%. On the other hand, the BSE IT Index-which comprises software companies-moved up by 62% in the same period.

What has hurt these BPOs stocks so much? Analysts tracking these stocks say that these BPO companies have no major competitive edge, with the result that their margins are continually being squeezed, especially due to rising employee cost.

The percentage of employee cost to net sales has shown a rise on a year-on-year basis. The employee cost to net sales for Cambridge Solutions rose to 52% in the September 2010 quarter from 37% in September 2009.

Similarly for the relevant periods, the percentage for Firstsource Solutions and Sparsh BPO rose to 52% from 50% and rose to 57% from 54% respectively. However, for Spanco, employee cost to sales percentage remained the same.

Allsec Technologies was the only one among the BPO stock selection whose cost to sales fell to 63% in the September 2010 quarter from 73% in September 2009.

"The BPO business generally comes from the global arena where there is huge competition. The increasing cost of employees and the change in rate of inflation increases the pricing and hence margins are pressured. Earlier the margins were around 18%-20%, but now they have dipped to 13%-14%. In December, due to the festive season, there was a dip in the business. The growth in this sector is muted to only around 2%-2.5%," said a research analyst from a leading brokerage firm, who preferred anonymity.

According to Rohit Anand, senior research analyst at PINC Research, "BPO companies have lagged behind in revenue growth and margins have also been affected due to the appreciation in the rupee, coupled with the high attrition rate in this industry."

Another analyst explains that these stocks are also depressed as various clients of these BPO companies are seeking consolidation of business (outsourcing with allied IT services), which may be a tough ask for a number of these service providers.

Consolidation among BPO companies might help, but even that is not happening. "There is not much of consolidation going on in the BPO industry. Over the past two quarters, fewer contracts were given to these companies. Going forward, these stocks may look up if consolidation takes place," said an analyst tracking IT stocks, requesting anonymity as he is not authorised to speak to the media.

KPO firm eClerx Services Ltd seems to be an exception, with the stock trending upwards. From the Rs269 level on 8 January 2008, the stock was at Rs695.55 in yesterday's trading. "eClerx has given strong returns over the past year," said Mr Anand.

Mr Anand added, "Going ahead, the performance of BPO companies is expected to be better as business volumes pick up. Billing rates have stabilised now, so there are no major headwinds for operating margins. Also, the attrition rate is expected to ease."


Capgemini promotes three Indian leaders to new global positions

Capgemini appoints Salil Parekh as CEO of application services in North America, UK and Asia Pacific, Aruna Jayanthi as the CEO of India operations and Baru Rao as the CEO of application services in Europe

Providers of consulting, technology and outsourcing services Capgemini said it has promoted its three Indian executives.

Salil Parekh, who was the chief executive officer (CEO) of global financial services, Asia Pacific and India offshore, is appointed as the CEO of application services businesses of Capgemini that include North America, the UK and Asia Pacific.

Aruna Jayanthi, who was the global delivery officer for Capgemini Outsourcing, is appointed as the new CEO of India operations. As a global delivery officer, she improved the quality, productivity and profitability of Capgemini's outsourcing operations worldwide.

Baru Rao, who was the CEO of India, will now be taking on a new role as the COO for application services in Europe with 22,000 employees. He will focus on the top line improvement through offshore leverage and innovation and margin improvement through industrialisation.


RIL gas output from eastern offshore fields set to increase

New Delhi: After experiencing a decline, Reliance Industries (RIL) (the flagship company of the Mukesh Ambani-led Reliance Group) is likely to regain 60 million standard cubic meters per day (mmscmd) of natural gas output from its eastern offshore KG-D6 fields by April, reports PTI quoting oil regulator DGH (Directorate General of Hydrocarbons).

Reliance has seen its natural gas output fall to 50-52 mmscmd during recent times from over 60 mmscmd achieved in mid-2010 due to reservoir complexities.

"They (Reliance) are producing natural gas from 18 wells currently. Two more wells have been drilled (but have not put on production) and another two are expected to be done by March.

"Once all 22 wells come onstream sometime in April 2011, gas output will again touch 60 mmscmd," Directorate General of Hydrocarbons (DGH) director general SK Srivastava said here.

The Dhirubhai-1 and 3 fields, known as D1 and D3, in the Krishna Godavari basin have seen output fall from 53-54 mmscmd achieved in mid-2010 to 42-44 mmscmd in the week ending 26th December.

Besides D1 and D3, D-26 or MA oilfield in the same block, is producing about 8 mmscmd as associated gas. Together, the output from KG-D6 currently stands at 50-52 mmscmd.

Mr Srivastava said there was nothing alarming about the fall in output as "wells behave differently at different times", producing different volumes of gas at different times.

"Reliance has a commitment to drill 22 wells in the first phase of development (of D1 and D3 fields) by March-April 2011 and we will ensure they meet the commitment," he said.

D1 and D3 are the largest among the 20 oil and gas finds that Reliance and its Canadian partner Niko Resources have made in the Krishna Godavari basin KG-DWN-98/3 or KG-D6 block off the Andhra coast.

"The reservoir is a complex one," he said.

Reliance has been forced to restrict production from the MA field to 18,200 barrels per day due to high water and gas output, sources said, adding the field was yielding more water than oil and that even 8 mmscmd of gas in comparison to 20,000 bpd of oil was considered quite high.

KG-D6 block had in mid-2010 hit a peak of 60 mmscmd after which the output has fallen, sources said.

Sources said Reliance will have to drill more wells to boost output to the approved peak of 80 mmscmd.

Currently, 18 wells on D1 and D3 have been completed and hooked to production system but only 16-17 are producing.

The company is currently selling 14 mmscmd of gas produced from KG-D6 to fertiliser plants, 26 mmscmd to power plants and remaining 12 mmscmd to other sectors like sponge iron plants, LPG, city gas distribution (CGD), petrochemical plants and refineries.

RIL had previously stated that it is carrying out further optimisation exercises at the MA oilfield in view of increasing water production levels. The field has five oil producing wells and one gas injection-cum-gas producer well.


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