The Essar Group’s decision to sell its business process outsourcing (BPO) arm, Aegis, may not be as easy as it seems. The reasons could be the pressure on the firm’s margins and the much-needed integration of the acquisitions it has done so far. More important, promoters may struggle to get the desired valuation due to the overall pressure the industry is underway. Also, there is the need to be the least priced player in the voice segment.
Aegis had maintained it was willing to dilute 25-30 per cent stake in the company to a strategic investor, and had been in talks with private equity players for this. “Aegis is looking at various equity-raising options, but it has nothing specific to announce now. All options relating to recapitalising our equity base are open. We are open to listing on domestic or international bourses. The company is currently engaged with a group of strategic/financial investors to divest part stake as a precursor to the listing,” said a company spokesperson.
Many in the industry point out that getting a 10-11 per cent multiple of the current Ebitda (earnings before interest, taxes, depreciation and amortisation) will be difficult. “Voice-based BPOs are being valued at 5-7x of Ebitda. The Intelenet-Serco buy was perhaps an aberration, as it valued the company at about 10.5 to 12 times its FY2011 Ebitda. However, this cannot be a benchmark, because the market has come down significantly since then and there is pricing pressure,” said a senior executive of a leading BPO firm in India.
In case the deal does not work out, Essar will not be the first at it. Another conglomerate, Aditya Birla Nuvo, too, had tried to sell its BPO arm, Aditya Birla Minacs, but has not been successful.
Last year, the diversified Aditya Birla Group tried unlocking the value for its BPO-IT business by tapping private equity investors. The group was looking at divesting a significant minority stake in the company or even an exit from the business altogether, provided it got a significant exit premium. Investment bank, UBS, reached out to marquee fund houses and strategic investors for an initial due diligence exercise. However, the plans did not go any further due to valuation mismatch.
In both the cases, there have been inherent issues like low margins and debt on books that might impact valuations. In the case of Aegis, the company has been kept on a BB rating with a ‘negative’ credit watch.
“We had given them a negative rating on two parameters. One was the delay in refinancing its bank facility, which they have done successfully. The other was weak performance. The company is yet to show us the latest figures for us to re-evaluate our ratings based on operations,” said Abhishek Dangra, credit analyst at Standard & Poor’s.
Dangra points out the firm’s margins have been low due to its focus on voice work and complete absence of non-linear growth strategy. The credit rating firm expects Aegis Ebitda to be in the range of 10-11 per cent for FY2012. “If you look around the industry, both domestic and international, players have margins in the range of 15-20 per cent,” he said.
“The other problem with promoters not getting the desired valuation is because many of these acquisitions are yet to be integrated. I would rather say that the company can create value if they focus on integration of all these acquisitions,” said another senior executive from the BPO industry.
Value in voice BPO
Raman Roy, CMD, Quattro BPO Solutions (also known as the father of the Indian BPO industry), believes voice-based BPO can still fetch good value. “There is still value in voice-based BPOs, but you need to be the lowest cost service provider. There is still a market for commoditised processes. Look around the globe, some of the largest players in the BPO segment are pure-play voice providers. For instance, Convergys and Teleperformance are the top players in this segment.”
Amneet Singh, VP-global sourcing, at advisory firm Everest Group, believes voice-based work is still very much in demand. But players who are into it need to have scale, global footprint and efficient delivery systems, as this is a very mature segment. “There is no lever of differentiation in this space, as efficiency is a given requirement. Hence, players who manage to get all this in place will certainly draw the attention of investors. Because, even in an industry that is getting mature, the clients still need to manage customer relationship, and voice-based BPO fits into it,” said Singh.
Singh says these reasons will see consolidation in the industry. One of the recent acquisitions, of vCustomer by Mahindra Satyam for $27 million, falls in this space. This acquisition will facilitate Mahindra Satyam BPO get entry into verticals like retail and consumer technology.
The Indian IT-BPO sector is expected to grow 11 per cent this year, according to Nasscom.