'BPO firms overvalued'

Industry and VCs expect realistic valuations to set in

A cross-section of the venture capitalists and a few establised large BPO players feel that Indian BPO firms are overvalued and it's time realistic valuations filtered in.

Pramod Bhasin, managing director, GECIS Global (former BPO arm of GE in India), said: "The valuations of Indian BPO firms are over the top and unrealistic. I guess it will take time for reality to sink in, as boys will get differentiated from men. Only after this can we look at some realistic valuations, further to which we can witness some active consolidation in the industry."

Bhasin added that GECIS is not currently looking for any acquisitions owing to this fact and will pursue M&As at a later stage.

Seconding this view are a few venture capitalists who are arguing that BPO entrepreuners are citing high valuations when seeking investments, which is not always in tune with potential.

Said Paul Deninger, vice-chairman, Jefferies & Company, Inc, an investment firm: "When entrepreuners come to us seeking investment, they commit a steady 50 per cent growth, based on which valuation is arrived at. However, invariably this growth rate is not sustained due to various reasons, and subsequently valuation dips."

"We factor in the future course of business when we invest, and we feel that this trend of unrealistic valuations should not be encouraged," he added.

A good barometer of a company's valuation is when the company lists and in most cases "we have seen that within 12 months of listing, the stock languishes."

Added Bhaskar Menon, president, MphasiS BPO: "It is true that valuations of BPO firms are pretty high and there should be realistic figures at the earliest so that the industry matures and grows in a systematic manner."

An industry analyst at Ernst & Young India tracking this sector said: "It is true that some BPO firms are valued higher, but I guess that is the cyclical nature of business.

It will take some time for realistic valuations and stability in the industry. Meanwhile, we can continue to witness the fast emergence of venture funded third-party ITeS firms in addition to captives and Indian IT firms foraying into BPO."

He added that despite these high valuations, venture capitalists will look at investing in Indian BPO firms as the industry is on a steep growth curve and as ITeS-BPO players are building global delivery capabilities, recruitment and engaging in M&A activity which will eventually witness $100 million sized deals.