Source:economictimes.indiatimes.com
MUMBAI: The results of Infosys BPO in the June 2007 quarter are a warning that the steep rupee appreciation may not only dent the margins of many BPO companies but could even wipe out the net profits of many small firms operating at lower margins.
Infosys BPO, one of the top 5 third-party BPOs in the country, saw its net margins fall from 21-22 per cent to 16-17 per cent during the quarter, according to the Infosys management.
In the company’s post-results management comments, CFO V. Balakrishnan said: “BPOs has been hit because they do not have a natural hedge in terms of expenses. Hence, so all the revenues are in dollars. Impact on the top line would flow into the bottom line. Net margins have come down from around 21-22 per cent to 16 per cent-17 per cent.”
Unlike the IT industry, which has both an onsite and offshore component, the BPO business is by definition an offshore process. So the impact on margins is greater. For IT companies, this is partially offset by the onsite component where both the revenues and expenses are in dollars so the margins are not affected. The offshore component is affected because the expenses are in rupees but the inflows are in dollars.
In Infosys, for example, on a consolidated basis the onsite and offshore revenues were split half-and-half in the June 2007 quarter. For the BPO business, however, nearly all the revenues would have been offshore, resulting in a larger hit on the margins. This also seen from the consolidated numbers of Infosys where the net margins were down only by 170 basis points or 1.7per cent, as compared to the 5 per cent hit in net margins for the BPO arm.
“If the BPO firm is operating at a net margin of 7-8 per cent, then it is possible that it’s profits can be completely wiped out. The rupee has appreciated by over 13 per cent against since last September. So unless rates can be re-negotiated in the next few quarters, it will be difficult going,” says Hexaware Technologies chairman Atul Nishar.
Many smaller firms have recently start hedging for currency risks. “Most of the companies are not going for any sophisticated hedging mechanisms. In my view, any company which does even $5-10 million in exports should have some hedging strategy,” Prashant Chawla, COO of BPO firm Integreon, said. Integreon has started hedging its currency from the June 2007 quarter.
“Hedging, re-negotiating rates and improving productivity-all these three levers will help. The average productivity in India is still much lower than in the US, so there is scope for improvement,” added Lokendra Tomar, senior V-P, knowledge services, Integreon.
For many companies, the results of these efforts will take some time to kick in. Rates can only be re-negotiated for new contracts and existing contracts that come up for renewal. So the impact will be gradual, not immediate. “To some extent, we are seeing that rates are being re-negotiated,” admitted a senior executive with a PE firm, evaluating investments in the BPO and IT space.
The answer to some of these problems may also to be a de-risked strategy in terms of the revenue-mix for BPO players. The same way, IT players have de-risked their revenues to avoid concentrating on a single geography such as the US, business process outsourcing players may have adopt a strategy, so there is a mix of domestic revenues and onshore revenues in addition to offshore revenues.
First source Solutions, is among the companies that have started taking on domestic business only since the December 2006 quarter. The company also has two centres in Northern Ireland, and centres in the US and Argentina. In India, the company services cellular services provider, Hutch, from four cities, Vijaywada, Kochi, Hubli and Trichy.
According to Firstsource MD and CEO, Ananda Mukherji, “The margins in the domestic business is not very different from our other business. The costs of a domestic operation are lower, so the margins are comparable.” This may in some part cushion the margins of BPOs which face the prospect of their net margins being completely eroded.
