Credit Problems Affect Indian BPOs

[HenryTo]

Following is courtesy of the WSJ:
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Credit Ills Strike Outsourcing Firms in India
By ROMIT GUHA
August 28, 2007; Page A2

BANGALORE, India -- Back-office outsourcing companies in India are being forced to redeploy staff members to different service lines as client losses and declining volume amid the U.S. subprime-mortgage turmoil bite into revenue.

Many back-office service providers in India -- such as the Infosys BPO arm of Infosys Technologies Ltd. and iGate Corp.'s iGate Global Solutions Ltd. unit -- offer mortgage-processing services to U.S. companies.

As U.S. lenders tighten the credit taps, and some, such as Capital One Financial Corp.'s GreenPoint Mortgage, close down, the follow-on activities contracted out to business-process outsourcing companies, or BPOs, decline accordingly.

"The volume of paperwork will surely go down as there will be fewer applicants, as fewer people will be willing to take loans," a Mumbai-based analyst, who didn't wish to be named, said. The analyst said loan acceptances also will decline as institutions will be unwilling to provide easy credit.

"Though it's difficult to make a call, there might be a 3%-4% negative impact on revenues for Indian BPOs" in the year ending March 31, he said.

The need for the number of staff members will also decline as work dries up, analysts said.

Neeraj Bhargava, chief executive of BPO outsourcer WNS (Holdings) Ltd. of Mumbai, said his company is in the process of redeploying 500 of its staff after one of its top 10 clients -- First Magnus Financial Corp. -- filed for bankruptcy protection in the U.S.

Infosys BPO and iGate have redeployed about 50 and 100 staff members, respectively, as their business with GreenPoint has dried up.

"There are likely to be staff cuts, but companies will first try and redeploy them towards other services," said Rishi Maheshwari, an analyst at Networth Stock Broking.

Alok Misra, chief financial officer at Mphasis Ltd. of Bangalore, said, "Redeploying staff in a BPO setup is costly as it involves retraining."

The exposure of BPOs to the mortgage market typically occurs in three stages: directly to a mortgage lender; to a financial institution that may buy the asset from the mortgage lender; and to the mortgage originator, with which the financial institution may have securitized the asset.

According to analysts, most Indian BPOs will face the biggest hit in the third stage, where the exposure is about 7%-8% of their revenue. The entities involved in the third stage are usually banks, hedge funds, pension funds and insurance companies.

As well as direct exposure to mortgage-related businesses, most Indian BPOs have between 25% and 35% of their total revenue coming from the general banking, financial services and insurance segment, analysts said.

According to Mr. Maheshwari, the full impact on Indian BPOs will be "clearer in the next two to three months" when U.S. companies re-evaluate their budgets and revise discretionary expenditures, which include information-technology spending. However, he said that the BPOs with direct exposure to mortgage lenders will already feel some pain.

He added that direct exposure to mortgage and mortgage-related sectors is typically about 3% to 5% of revenue for midsize IT-services companies such as WNS, i-Gate and Hexaware Technologies Ltd. of India.

WNS has announced a cut in its earnings forecast for this year. Hexaware officials didn't respond to an email on their business with companies exposed to the subprime fallout.

However, bigger companies, such as Infosys BPO and Wipro Ltd.'s BPO divisions, will ultimately "manage to absorb the shocks, as they have a much larger client base and the mortgage operations will form a much lesser part of their total revenue, spreading their risk," said the analyst who didn't wish to be named.

"There will be some impact on us, though minimal, maybe less than a million dollars," said Infosys BPO Chief Executive Amitabh Chaudhry.