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MphasiS: Riding the BPO wave

The economic slowdown gripping world economies is, in fact, proving to be a blessing in disguise for India. Lured by the advantages in terms of low-cost, high quality of services that Indian companies offer, international companies are increasingly looking towards Indian shores. BPO (Business Process Outsourcing) is one among them. In this article, we talk about MphasiS-BFL. This company has carved a niche in the BPO sphere and is treading on its way towards a brighter future in this space.

Formed in the year 2000 after the merger of BFL Software India with the US-based MphasiS Corp., the company has integrated its expertise in consultancy, software development and end-to-end business solutions. BPO, which MphasiS offers through its fully owned subsidiary MphasiS BPO, is targeted for clients located in the US, the UK and Canada. MphasiS BPO offers services that cover both the ends of outsourcing services - from basic technical help-desk services to high-end services like product simulation.

Despite present services in the BPO space, the future for MphasiS BPO seems bright. Consider the table below.

BPO: Opportunities galore!

 US$ bn  2001  2005  2008  CAGR (01-08) 
 Global BPO market 128.0234.0310.013.5%
 Target for Indian companies 49.0160.0222.0
 Indian ITES exports 1.59.521.045.8%
 Indian BPO exports 1.08.418.551.7%
 % share of target market
 % share of total BPO market
Source: Gartner-NASSCOM projections

Revenues from MphasiS BPO have more than tripled in the last three years (from 2% of sales in FY01, to 22% in FY03). Despite the downturn, MphasiS was able to improve its operating margins from 11% in FY02 to 18% in FY03. Going forward, while the company is likely to find it difficult to negotiate hikes in billing rates, higher growth in volumes could compensate for a decline or stagnation in billing rates.

While the BPO venture has been growing at a rapid pace, how does it compare with its competitors? In all parameters, MphasiS BPO seem to better Wipro Spectramind, as can be seen from the table below).

All said, MphasiS faces the risk of client concentration, as the largest client contributed to 13% of its total revenues. More concerning is that the largest client contributes to around 30% of MphasiS's BPO revenues. However, as the company reaches out to more customers in the future, this risk is likely to reduce.

Considering the strong growth prospects of the ITES industry and the fact that the services business is also likely to improve going forward, valuations for MphasiS are at the lower end of the software sector (as the graph above shows). At Rs 627, MphasiS is trading at a P/E multiple of 16x its FY03 earnings.