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K. Venkatasubramanian

BL Research Bureau Investors can avoid subscribing to the initial public offering of Excel Infoways, a voice-based BPO, given the stiff valuation that the offer demands and uncertainties on key aspects of its business.

At the upper end of the price band (of Rs 85) the offer demands 12 times its FY09 earnings per share on a post-offer expanded equity base. This is at a premium to (much larger and established) players such as eClerx Services and Hinduja Global Solutions.

Competition from large BPO players and BPO arms of IT majors could also affect the pricing power of Excel Infoways.

A high level of client concentration, the limited value addition possible in voice-based services, a high level of debtors as a percentage of revenues and possible increase in tax incidence due to the expiry of the STPI scheme after 2011 are key business concerns.

Excel Infoways provides voice-based contact centre services, mainly to telecom and financial services clients. This includes inbound and outbound calling for delivering various customer services, collections as well as customer acquisition.

The company has been in the business for six years.

For 2008-09, the company generated Rs 18.6 crore in revenues and Rs 14.8 crore as net profits. While this suggests a business with high profit margin, the global economic slowdown has actually started to tell on its financials.

The revenues for FY09 have fallen by 19.5 per cent over 2007-08. Net profits may have also fallen had it not been for Rs 3.3 crore in MAT Credit Entitlement that the company booked.

Excel Infoways generates over 98.8 per cent of its revenues from just four clients, suggesting concentration risk. A scaling down by any of its large clients can dent the revenue base substantially. Large clients are also likely to ask for pricing discounts (“more for less”) in the current environment of declining IT spends.

Being a voice-based BPO also creates other challenges.

These services command lower billing rates and if clients peg even this to the “outcomes” (a trend increasingly gaining momentum among large vendors), companies with limited capabilities such as Excel Infoways would find it hard-pressed to tailor their billing accordingly.

Excel also has seen its debtors to revenue ratio increasing from 40 per cent in 2006-07 to 48.1 per cent in 2008-09. This could be due to the fact that the company has started facing the recessionary pinch and has extended the credit period to its clients.

From a taxation perspective, the software technology parks of India scheme would come to an in 2011 for all IT/BPO players. With limited possibilities of moving to special economic zones, smaller BPO players such as Excel Infoways may be burdened with higher tax incidence.

From an industry angle, there is considerable vendor consolidation that clients around the world are resorting to, along with trimming their technology budget. So, the BPO arms of large IT companies may crowd out the deal landscape in integrated deals, leaving the smaller players in a tight spot.

Excel Infoways is issuing 5.67 million equity shares at a price band of Rs 80-85. The proceeds are to be used for setting up facilities and for funding strategic investments or joint ventures.

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