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Genpact IPO Good Bet Long Term but May have a Shaky Start

Genpact IPO – The India Street Analysis

July 19, 2007

Introduction:

Genpact Limited, a business process


outsourcing company (BPO) based in India
plans to raise about USD 700 million
through its IPO (initial public offering) at
the New York Stock Exchange. The company had filed a registration
statement with the Securities and Exchange Commission (similar to
SEBI) in US on May 11 this year. The company has proposed a price
band of USD 16 – 18 and the issue size is 35.29 million shares. It has
requested for the ticker ‘G’ previously used by Gillette a few years ago
before it was taken over by Proctor & Gamble. Morgan Stanley, Citi and
JPMorgan are the co-lead underwriters.

“Business Process Outsourcing” means relocating entire business


functions to either self-owned or third party service providers, typically
in low cost locations like India. Two Indian BPO’s have been listed in US
so far; WNS Holdings (NYSE) and EXL Service (NASDAQ).

Genpact is registered in the Caribbean island of Bermuda and has


operations in China, Hungary, India, Mexico, The Netherlands,
Philippines, Romania, Spain, United Kingdom and United States.

The company was formerly known as GE Capital International Services.


It was founded in 1997 at Gurgaon, India. General Atlantic and Oak Hill
Capital Partners acquired a 62.63% stake in Genpact from General
Electric in 2005.

Genpact has 5 sites in India at Gurgaon, Hyderabad, Bengaluru, Jaipur


and Kolkata. As of 2007, it has an employee strength of 30,000
globally.

Business Overview:

Genpact serves the following industries: Banking and Finance,


Insurance, Manufacturing, Transportation and Automotive.
Banking and Finance:

Genpact has more than 650 associates and 3,500 full time employees
serving businesses across USA, Europe, Australia and Asia from its
global locations in India, China, USA, Mexico and Hungary. A range of
customer end financial products including private label credit cards,
dual cards (PLCC with credit card functionality), retail finance, auto
finance, personal loans and mortgage are supported. The services
include finance and accounting, sales / marketing analytics, customer
services and financial services collections / operations.

Insurance:

More than 1,800 employees serve the insurance operations. Life


insurance, health insurance, annuities and pensions, mortage
insurance, liability insurance and property / casualty insurance are the
key areas covered. These services fall into 4 categories viz. insurance
policy set up and maintenance, agent support, billing / collections, risk
assessment / marketing and IT services.

Manufacturing:

The company serves high end manufacturing industries like power


systems, transportation etc. Services include online support, payment
collections, procurement assistance and execution, vendor co-
ordination, production planning / control and sales / marketing.

Transportation:

Genpact provides customer relationship and trade support, business


operations support, finance and accounting, employee services and
marketing support to global airlines, travel agencies, logistics service
providers, car rental firms etc.

Automotive:

Genpact's service solutions comprise of supporting clients across


component and sourcing execution, manufacturing forecasting and
planning, financing, after sales and dealer support. It helps its clients
gain control over their supply chain costs by providing transactional
procurement functions remotely, while also providing inventory
management planning through analytical techniques unique to the
offshore industry.
Genpact has direct fibre optic connectivity to US, Europe and Australia,
thus enabling redundancy for links and equipment. It has more than
500 servers and 10,000 desktops to perform the operations.
The proceeds of the IPO is proposed to be used for repayment of debts
outstanding under credit facilities and for working capital and general
corporate purposes, including potential acquisitions.

Financial performance in the past:

Description 2004 2005 2006


Income 165.50 187.90 252.20
Expenditure 83.60 171.00 209.00
Net income 81.90 16.90 43.20
Profit before tax 90.20 10.70 33.90
Income tax 6.70 -6.40 -5.90
Net profit 83.40 17.10 39.80

1. All figures are in million USD.


2. The financial year is considered as January – December.
3. It is to be noted that the general, selling and administrative
expenses for 2004, 2005 and 2006 were 76.3, 117.5, 159.2
million USD, the main reason for drop in net profits.

Indian companies listed at NYSE:

11 Indian companies are listed at NYSE, out of which 9 are constituents


of Nifty. Patni computer systems is a constituent of Nifty Junior index.
The full list is as follows: Dr.Reddy’s Laboratories, HDFC Bank, ICICI
Bank, MTNL, Patni Computer Systems, Satyam Computer Services,
Sterlite Industries, Tata Motors, VSNL, Wipro and WNS Holdings.

WNS Holdings got listed on July 26, 2006. EXL Service got listed at
NASDAQ on October 20, 2006. Let us analyze the daily charts of these
two stocks, since these are Indian BPO companies listed in US.

We can see the “double top” formation in both the charts between mid
November 2006 and mid February 2007. This is a bearish sign. As a
result, both the stocks had almost fallen back to their opening price on
listing, which is a key support level. In both cases watch the “upward
gap” or the “rising window” nearly a month after listing; a “downward
gap” or “falling window” just after the first peak in case of EXLS and
after the second peak in case of WNS. These indicate nearly identical
demand supply gap scenario for both the stocks. EXLS is still bearish;
WNS has just begun an upmove and currently in second wave.
EXL Service

http://groups.google.com/group/theindiastreet/web/EXLS.JPG

WNS Holdings

http://groups.google.com/group/theindiastreet/web/WNS.JPG

Charts courtesy: Yahoo! Finance


Conclusion:

As of now, the IPO details are being scrutinized by the SEC. Given the
technical scenario of both EXLS and WNS, Genpact may be a shaky
starter at NYSE. Another factor to be considered is the exchange rate.
An appreciating Indian Rupee, for example, may fetch lower revenues
in Indian currency; but the local expenditures, overheads and other
expenses may have to be met in local currency. This gives a distinct
disadvantage. However, going by the fundamentals, business model,
infrastructure, personnel and support services, Genpact is likely to
perform well in the long term.

SUNDARAMURTHY VADIVELU

LABELS: IPO, STOCK MARKET, NEW YORK STOCK EXCHANGE, UNITED


STATES, BPO, GENPACT, EXL SERVICE, WNS HOLDINGS, NASDAQ

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