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January 2008
Key Findings
Indian Domestic BPO is USD 1.8Bn industry in FY2008* and is expected to grow at a CAGR of 35% for the next 4
years, becoming a USD 6Bn industry in FY2012
Historically a captive market, outsourcing began in full earnest between 2003-08, with most 3rd party vendors growing
at over 100% to capture a 18% share of the overall market in FY2008
With the emergence of several large, proven and well-capitalized vendors, outsourcing will continue its momentum. It is
expected that 3rd party vendors’ market share will increase to 30% in FY2012
Customer care and Sales and Marketing are the two largest business segments and accounts for over 78% of the
overall market in FY2008
Banking, Insurance and Telecom are the key industry verticals and account for 68% of the overall market in FY2008;
Retail and Media and Entertainment are the emerging verticals
Because of the attractiveness of the market, many Global BPOs are entering this space, both organically and through
acquisitions
i iti
We expect rapid consolidation in this industry with 8-10 large players emerging as distinct market leaders over the next
18-24 months
2. Financial year is March ending Source: McKinsey Global Institute, “The Bird of Gold – The Rise of India’s Consumer Market
BANKING INSURANCE
RISE OF CONSUMERISM IN INDIA
Bank Deposits (USD Bn) No. of Life Insurance Policies Issued (Mn) Globals (>INR 1000K) 1.2 9.5
2.4 33.1
TELECOM REAL ESTATE Strivers (INR 500
500-1000K)
1000K)
10.9 94.9
Seekers (INR 200-500K)
166.0
38 91.3 93.1
Aspirers (INR 90-200K)
31
Deprived (<INR 90K) 101.1 49.9
25
90.1
19 2005 2025
52.2
22
33.6 Key changes in consumption pattern
FY04 FY05 FY06 FY07 FY04 FY05 FY06 FY07
Discretionary spend will rise from 52% to 70% of total private
No. of Mobile Subscribers… Real Estate Addition by IT Sector… consumption by 2025
Food will show the highest decline while spends on
RETAIL AVIATION health, education, transportation and communication will soar
Impact on business
16.0 35.0
As consumer income rises, they become more discerning.
12.0 Product Differentiation and Quality of Service will become
25.2
critical success factors.
9.0 19.4
7.0 15.7 Customer support, CRM, Loyalty Marketing and Marketing
Analytics
y will gain
g p
prominence as key
y business enablers
DOMESTIC BPO REVENUES (USD MN) MANPOWER EMPLOYED BY DOMESTIC BPO SECTOR
5,953 907,000
4,409
549,000 705,000
3,266
2,419 332,000
1,792 427,000
1,328 194,000
950
660 258,000
141,000
Source: Actuals till FY07 are Nasscom estimates; Projections from FY08 onwards are Source: Avendus Estimates
Avendus Estimates
At USD 1.8Bn, Domestic BPO industry constitutes less than 0.2% of India’s GDP
Outsourcing as an industry has been around since early 90s with introduction of credit cards and mobile phones in the country; BFSI and Telecom continue to be
the largest verticals even today
Lack of experience with outsourcing, absence of 3rd party vendors with significant scale and relatively slower growth experienced by target verticals resulted in
the market being predominantly captive till 2003
Early adopters of outsourcing started by outsourcing call center work to 3rd party vendors. Outsourcing began in full earnest only between 2003-08 resulting in
100%+ growth rate enjoyed by most 3rd party BPO players during this period.
Average revenue per person is about USD 5400 per annum; this is expected to grow at an average of 5% per annum
3rd PARTY DOMESTIC BPO REVENUES (USD MN) MANPOWER EMPLOYED BY 3rd PARTY DOMESTIC BPO SECTOR
1,783 272,000
1 160
1,160
186,000
127,000
758
497 61,000
328 88,000
170 9,000
, 17,000
42 86
33,000
FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E
SERVICE LINES OF DOMESTIC BPO SECTOR Segment CAGR Key 3rd Party Details
(2004-06) Players
While majority of the business in domestic BPO is in the call center space today, we believe two factors will drive growth in the back office processing segments.
Emergence of sophisticated players, which have different process capabilities and
Increased maturity among customers
1,026
1,058
855
713
720
594
495
477
379
300
FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E
MARKET SHARE OF INDIAN BANKS BY ADVANCES (FY2007) MANPOWER CATERING TO BANKING BPO
225,905
Canara Bank
5% 169 291
169,291
121,009
ICICI
10%
70,099
84,119
58,416
Others
59%
SBI
17%
FY07 FY08E FY09E FY10E FY11E FY12E
Source: Avendus Estimates
Source: Reserve Bank of India
Traditionally in the Indian banking sector, customer service and back-office transaction processing has been decentralized across branches. Consequently the
operations are handled at a branch level rather than in a centralized operations center.
Outsourcing in the banking sector is primarily led by private banks like ICICI and HDFC and MNC banks like Citibank, HSBC, ABN Amro etc.
Most of the outsourced work is customer service, telemarketing, contact point verification and collections, with bulk of the transaction processing work still being
captive
In our analysis, we have assumed that barring a few PSU banks, all the remaining PSU banks do not have any centralized BPO operations. However, with
increasing competition from private banks and an impending deregulation of the banking sector in FY2010, we have assumed some degree of BPO work from
PSU banks FY2010 onwards
9
FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E
HDFC 59,231
Bajaj Allianz Standard Others
3% 1% 6%
45,332
ICICI 51,818
P d ti l
Prudential 34 695
34,695
4%
39,659
30,353
LIC
86%
FY07 FY08E FY09E FY10E FY11E FY12E
Source: Insurance Regulatory & Development Authority Source: Avendus Estimates
The Insurance Regulatory and Development Authority (IRDA) Act of 1999 deregulated the insurance sector in India and allowed the entry of private companies into
the insurance sector. Moreover, the flow of Foreign Direct Investment (FDI) was also restricted to 26% of the total capital held by the Indian Insurance Companies.
In our analysis, we have considered only Life Insurance industry and not considered General Insurance industry, which is more B2B focused
Life Insurance industry in India is dominated by Life Insurance Corporation of India (LIC), which commanded a 86% share of the premiums collected in FY2006
For the purposes of estimation,
estimation we have assumed that LIC conducts all its transaction processing work through its branch offices,
offices while it is the private players who
have a centralized BPO looking after customer service and back-office operations. Thus the size of the market opportunity is a very conservative estimate.
Like Banking, Insurance BPO is also mostly captive, with customer service and telemarketing being the most commonly outsourced functions
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1,933
426
342 1,478
274 1,130
220 865
177
661
506
FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E
MARKET SHARE OF TELECOM OPERATORS (OCT 2007) MANPOWER CATERING TO TELECOM BPO
Others
17% Airtel 294,444
24%
Tata
9% 189,874
236 447
236,447
122,441
152,474
BSNL Reliance 98,323
15% 18%
Vodafone Essar
17%
FY07 FY08E FY09E FY10E FY11E FY12E
Source: AUSPI, COAI Source: Avendus Estimates
Telecom sector has been one of the early adopters of outsourcing in India
Most of the work outsourced is customer service, telemarketing and collections
With the number portability soon to be introduced by the Department of Telecom, sophisticated analytics based services like customer churn analysis, churn
management, behavioral segmentation etc. will gain prominence.
However for the purpose of estimation
estimation, we have assumed no change in service levels or increase in services performed by Telecom BPOs,
BPOs (i(i.e.
e number of BPO
FTEs required per 1000 customers has been held constant for the projection period) thereby making this a very conservative estimate
11
98
166
78
128
63
99
50
40 76
39
FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E
MARKET SHARE OF DOMESTIC AIR CARRIERS (CY 2006) MANPOWER CATERING TO TELECOM BPO
32,644
Others
12%
14,117
17,409
Air Sahara (now
JetLite)
9%
7,611
12
Note:
p
1. Base cost structure is Avendus’ expectation of FY08 financials for most of the top-tier
p pure-play
p p y domestic
BPO firms
2. A YoY price increase of 5%, 5%, 4% and 3% is assumed for FY09, FY10, FY11 and FY12 resp.
3. Rounding errors may occur
13
Almost all new facilities are coming up of clients The last few years have seen the
in tier 2/3 cities to tap a ready pool of emergence of several large, well-capitalized
low cost resources well-versed in players for e.g. Sparsh, InfoVision, Aegis
vernacular language With emergence of etc.
scale players, the
industry is rapidly
consolidating
Severe drain on management bandwidth to Aegis has led with 3 acquisitions in last 2
continuously recruit, train and monitor back years. Over the next 18 -24 months, 8-10
office staff when their core business is large players would dominate the entire
growing at between 20-50% third party vendor space in domestic BPO
Emergence of large players with proven
track record, referenceable client base and
dedicated focus to domestic BPO market
14
Referenceable
client base
Strong Access to
Management Capital
Team
Critical Success
Factors for
D
Domestic ti BPO
vendors
Scale National
Footprint
15
FINANCIAL METRICS
EBITDA Margin 18-20% 17-22% The key difference is Net Margin stems from
tax exemption granted to Global BPOs in
Net Margin 8-10% 10-15% India u/s 10A of STPI Act. This exemption
is currently proposed to be withdrawn in
April 2009
BUSINESS METRICS
C
Currency IImpactt (USD against
i t INR) N
None 13% iin llastt 12 months
th
16
Since all clients are either US/ UK based, the key language With 15 major languages spoken in various parts of India,
requirement is English having multi-lingual capabilities becomes necessary to serve the
Language Requirement domestic market
Typical call center agents are graduates, who have studied in Since the preference is for vernacular speakers, graduates
English-medium schools. However investment still needs to be with or without a formal training in English are acceptable. This
Wages and Training made for accent training to enable client interaction, resulting in expands the potential talent pool immensely resulting in lower
Costs
significantly higher wage and training costs. Typical salaries of cost of wages. Typical salaries of agents is USD 165 pm
agents is USD 375 pm
Since English speaking graduates are concentrated around Search for vernacular language talent makes this industry
a few major cities of India, almost all International call more spread out across India. Especially attractive are tier
Locational Constraint centers are located in the 7 cities of Delhi (incl. NCR), 2/3 cities, with a view to keep costs under control. Wages in
Mumbai, Bangalore, Chennai, Hyderabad, Pune, Kolkata these cities is about 60-70% of tier 1 cities, resulting in
most new facilities being set up there
Geographic concentration in a few major cities results in supply Annual attrition rates in tier 1 cities is 55-65% while that in
side imbalances resulting in higher annual salary increments and tier 2/3 cities is around 20-25%. Annual increments are about
Attrition Rate &
high attrition rates, resulting in higher recruitment and training 10-15%, but with most growth coming in tier 2/3 cities, where
Recruitment Costs
costs. Annual increments are about 10-15% while attrition rate is salary costs are 60-70% of that of tier 1 cities, overall wage
about 65-75% per annum inflation is about 5-10%
Another fallout of presence in tier 1 cities is higher Rent, utilities and transportation expenses in tier 2/3 cities
rent, utilities and transportation costs. are a fraction of tier 1 cities.
Rent, Utilities &
Transportation
17
At present 4% of our revenues come from the local market. We Our domestic business will primarily be in the domains that we
expect local BPO revenues to be 10% of our business in the next are already in…BFSI is, however, going to be the predominant
12 months. Margins are better than or equal to what we get from area in India. We plan to create separate infrastructure in tier-II
international business
business. and tier-III cities with a separate
p team. We will be looking
g at cities
like Hyderabad along with other tier-II cities.”
Ananda Mukherjee, CEO Firstsource Solutions
Source: The Economic Times, Jul 2007 Rohit Kapoor, President EXL Service
Source: Interview with Rediff Money, Nov 2007
18
Dec’07 Undisclosed Idea Cellular Mphasis Undisclosed Inbound and outbound customer service
Jan’07 8,000-10,000 Indian Railways Bharat BPO (A 50:50 10 years Voice and SMS-based integrated train enquiry services
JV between Omnia &
S
Spanco))
May’06 Undisclosed Centurion Bank Indecomm Global Undisclosed Created a JV called Centillion Solutions to focus on back-
of Punjab office processing services to retail banking & related financial
services.
Jan’06 50 Delhi Sparsh 5 years Sparsh will set up a voice and web-based public grievance
Government management system and providing contact center services.
Aug’05 10,000 Airtel HTMT, Mphasis, IBM 4-5 years Airtel’s call center operations for all its subscribers across 23
Daksh, TeleTech India circles would be handled by the 4 vendors
Aug’05 2500 SBI Mphasis 3-5 years The engagement involves handling of customer support
operations, mainly voice based inbound services
Aug’05 800 BSNL Sparsh 3 years Sparsh will be responsible for BSNL’s domestic call center
operations
Aug’05 50 Air India Sparsh 3 years Inbound customer service to all domestic passengers
May’00 Undisclosed Star TV Dialnet Based on the Star Plus' biggest game show 'KBC' used the IVR platform of
Communications duration of the Dialnet for the callers participating in the quiz for screening of
show contestants. Dialnet handled over 100 Mn calls during the
p of the show. It also p
span provides IVR facilities to other
shows of the network
Note: We have compiled only publicly listed information. Since almost all companies in this sector are privately-held, most of the outsourcing contracts are not in pubic domain.
19
2007 Aegis Teletech India (A JV between Teletech & Bharti Airtel) Acquisition 13
2005 Intelenet Sparsh BPO (Domestic BPO business of Spanco Telesystems) Acquisition 22
Several large international and Indian BPO players have expressed a keen interest in entering this space.
We expect at least 3 out of the top 10 domestic BPO players to consider a strategic or financing transaction in the next 18-24 months
20
Indian Domestic BPO is USD 1.8Bn industry in FY2008* and is expected to grow at a CAGR of 35% for the next 4
years, becoming a USD 6Bn industry in FY2012
Historically a captive market, outsourcing began in full earnest between 2003-08, with most 3rd party vendors growing
at over 100% to capture a 18% share of the overall market in FY2008
With the emergence of several large, proven and well-capitalized vendors, outsourcing will continue its momentum. It is
expected that 3rd party vendors’ market share will increase to 30% in FY2012
Customer care and Sales and Marketing are the two largest business segments and accounts for over 78% of the
overall market in FY2008
Banking, Insurance and Telecom are the key industry verticals and account for 68% of the overall market in FY2008;
Retail and Media and Entertainment are the emerging verticals
Because of the attractiveness of the market, many Global BPOs are entering this space, both organically and through
acquisitions
i iti
We expect rapid consolidation in this industry with 8-10 large players emerging as distinct market leaders over the next
18-24 months
21
• Overview: A leading provider of customer lifecycle • Overview: One of the largest independent ITES
• Overview: A Hinduja group company, it is one of the
management solutions across companies in India, providing customer
leading providers of inbound contact center services
BFSI Telecom,
BFSI, Telecom Healthcare and Media verticals contact direct marketing
contact, marketing, loyalty and fulfillment
& transaction processing
• Locations: programs
• Locations: Bangalore, Chennai, Durgapur,
Bangalore, Chennai, Hubli, Indore, Kochi, Kolkata, M • Locations:
Hyderabad, Mumbai and Mysore
umbai, Pondicherry and Trichy Bangalore, Chennai, Delhi, Gurgaon, Hyderabad, Ko
• Employees*: 11,000+ lkata, Mumbai and Pune
• Employees*: 15,000+
• Financials: (FYE March07): $39.3Mn# • Employees: 8,100+
• Financials: (FYE March07): $186.6Mn#
Source: Company data, Reuters; 1 USD = 39.5 INR; * Includes employees catering to International BPO operations as well; # Includes both International and Domestic BPO revenues
23
• O
Overview:
i Th BPO A
The Arm off K
Kankei
k iGGroup off • Overview: A subsidiary of EDS
EDS, providing contact
center solutions to telecom sector • Overview: Part of MCorpGlobal group of companies
companies, providing voice-based services (inbound and is engaged in providing domestic contact center
& outbound), SCM, direct marketing & CRM services • Locations:
services to travel and telecom sector
• Locations: Ahmedabad, Bangalore, Chennai, Delhi, Ahmedabad, Bangalore, Noida, Pondicherry and
Indore • Locations: Bangalore, Chennai, Delhi, Hyderabad,
Hyderabad, Kolkata, Mumbai and Pune Kolkata, Mumbai, Noida and Pune
• Employees: 2,500+ • Employees*: 17,000+
• Employees: 3,000+
• Financials (FYE March07): $ 302.7Mn#
• Market Cap p ((21/11/2007):
) $1.1Bn
Source: Company data, Reuters; 1 USD = 39.5 INR; * Includes employees catering to International BPO operations as well; # Includes both International and Domestic BPO revenues
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