Source it, but get a vision

An industry that has emerged as a solid employment generator in India is the business process outsourcing (BPO). In fact, according to a Nasscom report, the BPO domain's contribution to the GDP is expected to rise from 4.8% in FY06 to 5.4% in FY07. Nasscom also reports that BPO providers to date have captured less than 16% of the potential of the offshore BPO market. Hence there continues a battle among BPO players to grab a larger pie of this still-unexplored BPO market. And in the battle for tapping into the maximum potential of this potent territory, First Source Solutions Ltd (erstwhile ICICI One Source), a leading BPO provider, has made its intentions clear to be a forerunner among the listed entities. The company, primarily into BPO service provider of BFSI, tele-communications and health-care industry, has entered into the capital market with an offering of 693 lakh shares at a price band of Rs 54-64. It intends to raise around Rs 374-443 crore through the issue.

The company plans to set up 20 delivery centres; 11 in India and six in the US, two in the UK and one in Argentina. For this, it plans to use at least Rs 47 crore from the issue proceeds. It has targeted Rs 180 crore from the issue proceeds for acquisitions. These moves are expected to grow the business prospects for the company. In addition, the company also intends to use Rs 45 crore of the proceeds for its debt repayment.

On the valuation front, considering post-issue capital, on annualised earnings of FY07 the EPS works out to Rs 3.03 and P/E on the lower and upper end of the price band works out to around 17. 78(x) and 21.08(x) respectively.

In the fiscal 2006, the company derived a substantial portion of its income from BFSI services (63.5%), while telecom and health-care venture contributed 5.7% and 25.7% respectively. Hence the company's BPO services is BFSI-dominated with its presence in telecom and health care. BFSI-based services are clocking a growth of 30-35% and are one of the good drivers of the BPO industry.

 

The company's aggressive approach for inorganic growth and its strong management package emerge as positives. Also, for nine months period till December 31 2006, the company has recorded phenomenal growth. The company's total income for the period was around Rs 562 crore, thanks to the robust integration of inorganic growth after acquisitions and a crucial agreement with Metavante, a leading provider of financial services in the US. The BPO player's plans to use at least Rs 180 crore for acquisitions are a solid indicator of the company's endeavour to consolidate its position in the market. But a prime concern remains of clarity of strong growth visibility path post acquisitions. This needs an immediate consideration. And investors must take into account these facts while making investment decision.