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Slide 1: Indian Domestic BPO Market – An Emerging Opportunity January 2008
Slide 2: 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 Oligopolistic market str ct re within the 3rd part vendor landscape; top 12 pla ers acco nt for 75% of the third part structure ithin party endor landscape players account party domestic BPO revenues in FY2008 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 *FY follows April-March cycle 2 Private & Confidential
Slide 3: Rapid growth of Indian economy over the last few years has resulted in increased consumption… India’s growth has accelerated progressively since 1960s. From the ‘Hindu Rate of Growth’ of 3.5% up to 1980, growth accelerated to 6% following the reforms in 1980s and early 90s Over the past four years, the GDP growth performance has been even more impressive, averaging 8.5% per year; and over the last fiscal it was 9.4%, the fastest rate in 18 years In 2006, India became the 12th largest economy at current exchange rates and 3rd largest in purchasing power parity terms It is now widely believed that India’s growth acceleration is more structural than cyclical, with an investment boom and high productivity enhancing the economy’s productivity. Consequently India is projected to enjoy sustainable growth rate of 8-9% till 2020 th t f 8 9% 2020. Economic growth has brought about a spurt in per capita GDP, resulting in a rapidly growing middle class. Per Capita GDP increased at a CAGR of 8.6% between FY04 to FY07. A recent study by McKinsey Global Institute states that India will witness rapid g p growth of its middle class – households with disposable incomes from p USD 5,000 – 50,000 a year. That class, which now comprises of about 50Mn people (~5% of population) will enlarge to about 583Mn people (~41% of population) by 2025. Rising incomes, the creation of a massive middle class and growing population will propel India to become the 5th largest consumer market by 2025. Consumption will increase at an aggregate rate of 7.3 p p gg g percent annually over the next 20 years to reach nearly USD 1.7 Trillion GROWTH OF INDIA’S GDP (USD BN) 8.5% 7.5% 892 782 691 615 9.0% 9.4% 1,031 3.8% FY03 FY04 FY05 FY06 FY07 GDP at Market Prices Real GDP Growth Rate Source: Ministry of Statistics and Programme Implementation DRIVERS OF CONSUMPTION GROWTH IN INDIA (USD BN) 209 1,058 1 058 48 1,738 422 Source: The McKinsey Quarterly, Lehman Brothers Report titled ‘India: Everything To Play For’, Goldman Sachs BRIC Report Note: 1. 1 A uniform exchange rate of 40 INR t a USD h b if h tf to has been used f all d for ll years 2. Financial year is March ending 3 Private & Confidential Private consumption 2005 Contribution to overall consumption growth Disposable Income Growth Growth in no. of households Changes in savings Private consumption 2025 80% 16% 6% 4% % Source: McKinsey Global Institute, “The Bird of Gold – The Rise of India’s Consumer Market
Slide 4: …fueling the growth of Indian domestic economy BANKING INSURANCE RISE OF CONSUMERISM IN INDIA The shape of the income pyramid will undergo significant change in the next 20 years. A McKinsey study divides the Indian households in five economic classes based on real annual disposable income. income NO. OF HOUSEHOLDS BY ANNUAL INCOME BRACKET (Mn) FY04 FY05 FY06 FY07E FY04 FY05 FY06 FY07E Globals (>INR 1000K) Strivers (INR 500 1000K) 500-1000K) Seekers (INR 200-500K) 166.0 38 31 90.1 19 52.2 22 33.6 FY04 FY05 FY06 FY07 FY04 FY05 FY06 FY07 25 2005 2025 Aspirers (INR 90-200K) Deprived (<INR 90K) 1.2 2.4 10.9 91.3 101.1 9.5 33.1 94.9 93.1 49.9 Bank Deposits (USD Bn) No. of Life Insurance Policies Issued (Mn) 674.0 540.0 459.0 390.0 70.4 88.4 76.0 99.0 TELECOM REAL ESTATE Key changes in consumption pattern No. of Mobile Subscribers… Real Estate Addition by IT Sector… Discretionary spend will rise from 52% to 70% of total private consumption by 2025 Food will show the highest decline while spends on health, education, transportation and communication will soar Impact on business RETAIL AVIATION 16.0 12.0 9.0 7.0 15.7 19.4 25.2 35.0 As consumer income rises, they become more discerning. Product Differentiation and Quality of Service will become critical success factors. Customer support, CRM, Loyalty Marketing and Marketing Analytics will gain p y g prominence as key business enablers y FY04 FY05 FY06 FY07 FY04 FY05 FY06 FY07 Size of Organized Retail Industry (USD Bn) No. of Domestic Passengers… 4 Private & Confidential
Slide 5: Spurred by the growth in consumption, the Indian Domestic BPO market is expected to grow at a CAGR of 35% for the next 4 years DOMESTIC BPO REVENUES (USD MN) 5,953 MANPOWER EMPLOYED BY DOMESTIC BPO SECTOR 907,000 4,409 549,000 3,266 2,419 1,792 1,328 660 950 258,000 141,000 FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E 705,000 332,000 427,000 194,000 FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E Source: Actuals till FY07 are Nasscom estimates; Projections from FY08 onwards are Avendus Estimates Source: 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 5 Private & Confidential
Slide 6: With the emergence of several large and proven 3rd party BPO players, their market share will increase from the current 18% to 30% by 2012; Top 12 players account for 75% of the 3rd party market share 3rd PARTY DOMESTIC BPO REVENUES (USD MN) 1,783 MANPOWER EMPLOYED BY 3rd PARTY DOMESTIC BPO SECTOR 272,000 1,160 1 160 127,000 758 497 328 42 FY05 186,000 61,000 88,000 9,000 , 17,000 33,000 86 170 FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E Source: Avendus Estimates Source: Avendus Estimates 3rd PARTY MARKET SHARE Key reasons for rapid increase in market share of 3rd party players With most underlying customer industries growing at between 20-70% per annum, there is an increasing realization to focus on the core business while partnering with 3rd party vendors to tackle the non-core operations Several large 3rd party players with proven delivery experience, robust and scalable infrastructure and a referenceable client base have emerged Increasing realization of the attractiveness of the Indian domestic BPO business is resulting in many large players previously focused on International BPO to now focus on the domestic sector High attrition rates of between 55-65% per annum is putting an enormous strain on management bandwidth of organizations running their captive operations FY06 FY07 FY08E FY09E FY10E FY11E FY12E 30% 26% 23% 21% 18% 13% 9% 6% FY05 Source: Avendus Estimates 6 Private & Confidential
Slide 7: Customer care and sales and marketing are the two largest business segments accounting for 78% of the revenues SERVICE LINES OF DOMESTIC BPO SECTOR Segment Customer Care 33% 42% CAGR (2004-06) 110% Key 3rd Party Players Aegis, HTMT, IBM, InfoVision, Omnia, Mphasis, Sparsh Details Largest and fastest growing segment. Dominated by voice-based inbound and outbound activities spanning the entire customer lifecycle from origination to retention. retention Driven primarily by growth in sectors like BFSI, Telecom & Consumer Durables. One of the largest segment of the domestic BPO market. Predominantly focused on outbound voice-based activities aimed at upselling and cross-selling various p g g products. Primarily driven by basic payroll processing services. It is expected to move high-end contracts where the HR outsourcing provider will manage the entire employee systems. Dominated by specialist HR firms. F&A services are focused on transaction processing and are driven primarily by demand from the retail banking and credit card products in BFSI sector (e.g. credit card processing, electronic bill payment etc.) Other discrete BPO activities in specific areas include examples like participant contact for television game shows, order management etc. 51% S&M 45% Andromeda, Direm, InfoVision, Kankei, Omnia , Cross-Domain, Hewitt, Ma Foi, Teamlease 37% 32% 27% 10% 11% 9% 2004 12% 8% 6% 2005 12% 5% 5% 2006 HR 82% Customer Care Source: Nasscom-IDC Study Sales & Marketing HR F&A Others F&A 16% Bill Junction, Venture Infotek, Others 19% Dialnet Communications 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 7 Private & Confidential
Slide 8: Banking, Insurance and Telecom constitute nearly 68% of the overall market; Retail, Media & Entertainment are the emerging verticals VERTICAL SPLIT OF DOMESTIC BPO REVENUES Verticals Telecom 37% 36% 35% 34% 32% Banking and Financial Services Travel 9% 4% 31% 8% 4% 31% 7% 4% 31% 7% 4% 32% Manufacturing (Consumer Durables, Automobiles etc) Others (Retail, Media) Typical Processes Outsourced Customer support, cross-selling, analytics, data validation, HR Customer support marketing and sales collections support, sales, collections, billing, transaction processing, analytics, HR Customer support, sales and marketing, revenue accounting Customer support, sales and marketing, transportation, supply chain management, AP and AR processing management 21% 10% 4% 27% 20% 22% 24% 25% FY2008 Telecom FY2009 Banking FY2010 Insurance FY2011 Travel Others FY2012 HR, customer support, marketing and sales, billing, transaction processing, analytics, CRM Source: Avendus Estimates * Others consists of sectors like Retail, Media & Entertainment, Consumer Durables, Technology, Automotive and Public Information 8 Private & Confidential
Slide 9: BPO opportunity from Banking sector is currently about USD 380Mn; Expected to grow at a CAGR of 38% to USD 1.5Bn in FY2012 GROWTH IN ADVANCES BY BANKS IN INDIA (USD BN) 1,231 1,026 1,058 855 713 594 495 477 379 300 720 BPO REVENUES FROM BANKING SECTOR (USD MN) 1,483 FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E Source: Motilal Oswal Report on Indian Banking Sector p g Source: Avendus Estimates MARKET SHARE OF INDIAN BANKS BY ADVANCES (FY2007) Bank of Baroda 4% MANPOWER CATERING TO BANKING BPO 225,905 PNB 5% Canara Bank 5% ICICI 10% 121,009 169,291 169 291 70,099 84,119 Others 59% SBI 17% 58,416 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 Private & Confidential
Slide 10: BPO opportunity from Insurance sector is currently about USD 190Mn; Expected to grow at a CAGR of 20% to USD 390Mn in FY2012 GROWTH IN LIFE INSURANCE PREMIUM COLLECTED (USD BN) 80 70 61 53 46 40 156 187 225 270 324 BPO REVENUES FROM INSURANCE SECTOR (USD MN) 389 FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E Source: McKinsey y Source: Avendus Estimates MARKET SHARE OF LIFE INSURANCE COMPANIES BY PREMIUM COLLECTED (FY2006) Bajaj Allianz 3% ICICI Prudential P d ti l 4% HDFC Standard 1% Others 6% MANPOWER CATERING TO INSURANCE BPO 59,231 45,332 51,818 34,695 34 695 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, we have assumed that LIC conducts all its transaction processing work through its branch offices, while it is the private players who estimation offices 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 10 Private & Confidential
Slide 11: BPO opportunity from Telecom sector is currently about USD 660Mn; Expected to grow at a CAGR of 31% to USD 1.9Bn in FY2012 GROWTH IN WIRELESS SUBSCRIBERS (MN) 530 1,933 426 342 274 220 177 506 661 865 1,130 1,478 BPO REVENUES FROM TELECOM SECTOR (USD MN) FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E Source: Edelweiss Capital Report on Telecom Sector p p Source: Avendus Estimates MARKET SHARE OF TELECOM OPERATORS (OCT 2007) Others 17% Airtel 24% MANPOWER CATERING TO TELECOM BPO 294,444 Tata 9% 189,874 236,447 236 447 122,441 152,474 BSNL 15% Vodafone Essar 17% Reliance 18% 98,323 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 we have assumed no change in service levels or increase in services performed by Telecom BPOs (i e number of BPO estimation, BPOs, (i.e. FTEs required per 1000 customers has been held constant for the projection period) thereby making this a very conservative estimate 11 Private & Confidential
Slide 12: BPO opportunity from Travel sector is currently about USD 76Mn; Expected to grow at a CAGR of 40% to USD 210Mn in FY2012 GROWTH IN DOMESTIC AIR PASSENGERS (MN) 122 98 78 128 63 50 40 39 76 99 BPO REVENUES FROM TELECOM SECTOR (USD MN) 214 166 FY07 FY08E FY09E FY10E FY11E FY12E FY07 FY08E FY09E FY10E FY11E FY12E Source: Center for Asia Pacific Aviation Source: Avendus Estimates MARKET SHARE OF DOMESTIC AIR CARRIERS (CY 2006) Others 12% MANPOWER CATERING TO TELECOM BPO 32,644 Kingfisher 9% Jet Airways 31% 14,117 21,469 26,470 Air Sahara (now JetLite) 9% 7,611 17,409 Air Deccan 18% Indian 21% FY07 FY08E FY09E FY10E FY11E FY12E Source: Directorate General of Civil Aviation Source: Avendus Estimates Travel & Hospitality sector, particularly domestic and international air travel, has seen an exponential growth in recent times The signing of a 10-year contract by Indian Railways with a consortium of Omnia BPO and Spanco Telesystems for the provision of integrated train enquiry system demonstrates the changing mindset towards customer service For the purposes of estimation, we have only considered the BPO requirements of domestic air and rail travel sectors The primary functions outsourced are customer care online booking of tickets, passenger information services while back-office processes like revenue care, tickets accounting continue to be captive for now 12 Private & Confidential
Slide 13: Tighter cost control by moving to tier 2/3 cities, leveraging economies of scale and a modest increase in price will boost margins for domestic BPOs, steady state net income margins of 12% is expected for most established players by FY12 CHANGING COST STRUCTURE OF DOMESTIC BPOs (% OF REVENUES) Key Elements of Cost Structure of Domestic BPO Players Personnel costs account for nearly 46% of revenues currently. Wage costs have been rising between 10-12% annually in all major cities of India. However with almost all domestic BPOs now moving to tier 2/3 cities, both wage costs and attrition are likely to temper. Salaries in tier 2/3 cities are 60-70% of tier 1 cities and attrition levels are less than 15% per annum. 46% 48% 49% 50% Telecom & Connectivity costs account for 8% of revenues. Over the last few years, telecom costs have been steadily decreasing Rent & Utilities account for 8% of revenues and are increasing between 47% per annum 10% 8% 8% 8% 6% FY08 Direct Salary Rent & Utilities 50% 8% 8% 8% 7% 6% FY09 7% 9% 8% 6% 5% FY10 General & Administrative Telecom & Connectivity Costs 6% 9% 8% 5% 5% FY11 5% 10% 8% % 4% 5% FY12 Sales & Marketing costs account for between 8% of revenues currently. It being ill b i still early d l days f outsourcing i d for i in domestic markets, a consultative i k li approach to selling is required, increasing the sales and marketing costs. General & Administrative costs account for 10% of revenues currently. With most top tier Domestic BPOs growing between 75-100% per annum over the last few years, costs have spiraled. With increase in the scale of operations and infusion of professional management team, operating leverage will kick-in, resulting i d l ill ki k i lti in decrease of G&A costs as a percentage of f t t f revenues. Depreciation accounts for about 6% of revenues currently. With over 50% growth projected by most companies, a high degree of capex would need to be maintained, keeping it around the same level over the next few years. Tax – A full corporate tax rate of 33.99% is applicable to the Indian p pp Domestic BPO sector Sales & Marketing Depreciation FY08 EBITDA Margin Net Margin 20% 9% FY09 20% 10% FY10 21% 11% FY11 22% 11% FY12 23% 12% Note: p p p py 1. Base cost structure is Avendus’ expectation of FY08 financials for most of the top-tier pure-play 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 Private & Confidential
Slide 14: Key trends in the Domestic BPO market Increase in minimum scale criteria for participating in a RFP With client industries growing between 20-70% pa, it is critical for them to identify vendors capable of growing at the same rate. Scale and capitalization have thus become key factors in winning business. y g Entry of International Call Center Operators in Domestic Market Domestic business acts as a hedge to global business. Most leading IT/BPO companies including Firstsource, Wipro, Mphasis etc. are looking to scale up their domestic business Movement to tier 2/3 cities Almost all new facilities are coming up in tier 2/3 cities to tap a ready pool of low cost resources well-versed in vernacular language Quality of service and ability to scale rapidly bilit t l idl are the key concerns of clients With emergence of scale players, the industry is rapidly consolidating Emergence of scale players The last few years have seen the emergence of several large, well-capitalized players for e.g. Sparsh, InfoVision, Aegis etc. Increasing outsourcing to 3rd party vendors Severe drain on management bandwidth to continuously recruit, train and monitor back office staff when their core business is growing at between 20-50% Emergence of large players with proven track record, referenceable client base and dedicated focus to domestic BPO market Market Consolidation Aegis has led with 3 acquisitions in last 2 years. Over the next 18 -24 months, 8-10 large players would dominate the entire third party vendor space in domestic BPO 14 Private & Confidential
Slide 15: With scale and proven delivery experience with marquee client base emerging as critical success factors, new players are going to find it increasingly difficult to penetrate the market Referenceable client base Strong Management Team Access to Capital Critical Success Factors for Domestic BPO D ti vendors Scale National Footprint 15 Private & Confidential
Slide 16: Despite pricing levels in domestic BPO being significantly lower than its international counterpart, the EBITDA margins are equally attractive. FINANCIAL METRICS Metric Annual revenue per FTE (USD) Gross Margin EBITDA Margin Net Margin Domestic BPO 5,100-5,700 35-40% 35 40% 18-20% 8-10% International BPO 18,000-20,000 35-40% 35 40% 17-22% 10-15% The key difference is Net Margin stems from tax exemption granted to Global BPOs in India u/s 10A of STPI Act. This exemption is currently proposed to be withdrawn in April 2009 BUSINESS METRICS Metric Avg. annual salary of agents (USD) Annual Attrition Rate Wage Inflation Currency I C Impact (USD against INR) t it Location Domestic BPO 2,000 55-65% 5-10% None N Tier 2/3 cities International BPO 4,500 65-75% 10-15% 13% i l t 12 months in last th Tier 1 cities 16 Private & Confidential
Slide 17: English-speaking capabilities being the key skill required, International call centers are constrained to tier 1 cities resulting in much higher cost structures International Call-Center Since all clients are either US/ UK based, the key language requirement is English Language Requirement Indian Domestic Call-Center With 15 major languages spoken in various parts of India, having multi-lingual capabilities becomes necessary to serve the domestic market Wages and Training Costs Typical call center agents are graduates, who have studied in English-medium schools. However investment still needs to be made for accent training to enable client interaction, resulting in significantly higher wage and training costs. Typical salaries of agents is USD 375 pm Since English speaking graduates are concentrated around a few major cities of India, almost all International call centers are located in the 7 cities of Delhi (incl. NCR), Mumbai, Bangalore, Chennai, Hyderabad, Pune, Kolkata Since the preference is for vernacular speakers, graduates with or without a formal training in English are acceptable. This expands the potential talent pool immensely resulting in lower cost of wages. Typical salaries of agents is USD 165 pm Locational Constraint Search for vernacular language talent makes this industry more spread out across India. Especially attractive are tier 2/3 cities, with a view to keep costs under control. Wages in these cities is about 60-70% of tier 1 cities, resulting in most new facilities being set up there Annual attrition rates in tier 1 cities is 55-65% while that in tier 2/3 cities is around 20-25%. Annual increments are about 10-15%, but with most growth coming in tier 2/3 cities, where salary costs are 60-70% of that of tier 1 cities, overall wage inflation is about 5-10% Rent, utilities and transportation expenses in tier 2/3 cities are a fraction of tier 1 cities. Attrition Rate & Recruitment Costs Geographic concentration in a few major cities results in supply side imbalances resulting in higher annual salary increments and high attrition rates, resulting in higher recruitment and training costs. Annual increments are about 10-15% while attrition rate is about 65-75% per annum Another fallout of presence in tier 1 cities is higher rent, utilities and transportation costs. Rent, Utilities & Transportation 17 Private & Confidential
Slide 18: Recent comments by BPO industry leaders reflect a growing interest in Domestic BPO At present 4% of our revenues come from the local market. We expect local BPO revenues to be 10% of our business in the next 12 months. Margins are better than or equal to what we get from international business business. Ananda Mukherjee, CEO Firstsource Solutions Source: The Economic Times, Jul 2007 Our domestic business will primarily be in the domains that we are already in…BFSI is, however, going to be the predominant area in India. We plan to create separate infrastructure in tier-II and tier-III cities with a separate team. We will be looking at cities p g like Hyderabad along with other tier-II cities.” Rohit Kapoor, President EXL Service Source: Interview with Rediff Money, Nov 2007 We plan to ride this wave of the domestic BPO boom and consolidate our position further by focusing on areas that are traditionally considered weak in the domestic BPO sector such as service quality. Susir Kumar, CEO Intelenet Global Source: Interview with Nasscom, Apr 2006 Our strategic entry into the domestic outsourcing market in India has begun to yield results. This gives us a unique early mover results advantage into this growing market. Seven new clients were added this year in the domestic business, including major wins in the Telecommunications, Banking and Insurance domains. Strong foundations have been laid to grow this business line profitably in the coming years.” Partha De Sarkar, CEO Hinduja TMT Source: FY06 Annual Report, Aug 2006 The main reason why we got into domestic market is because it acts as a hedge to our global business Alok Mishra, CFO Mphasis Source: Mint, Nov 2007 18 Private & Confidential
Slide 19: There has been a spate of recent outsourcing contracts contributing to a growth rate of over 100% in the last 3 years for 3rd party players Timing of Signing Dec’07 Jan’07 Contract Size (INR Mn) Undisclosed 8,000-10,000 Client Vendor Duration Nature of Engagement Idea Cellular Indian Railways Mphasis Bharat BPO (A 50:50 JV between Omnia & Spanco) S ) Indecomm Global Undisclosed 10 years Inbound and outbound customer service Voice and SMS-based integrated train enquiry services May’06 Undisclosed Centurion Bank of Punjab Delhi Government Airtel SBI BSNL Air India Star TV Undisclosed Created a JV called Centillion Solutions to focus on backoffice processing services to retail banking & related financial services. Sparsh will set up a voice and web-based public grievance management system and providing contact center services. Airtel’s call center operations for all its subscribers across 23 circles would be handled by the 4 vendors The engagement involves handling of customer support operations, mainly voice based inbound services Sparsh will be responsible for BSNL’s domestic call center operations Inbound customer service to all domestic passengers Star Plus' biggest game show 'KBC' used the IVR platform of Dialnet for the callers participating in the quiz for screening of contestants. Dialnet handled over 100 Mn calls during the span of the show. It also p p provides IVR facilities to other shows of the network Jan’06 Aug’05 Aug’05 Aug’05 Aug’05 May’00 50 10,000 2500 800 50 Undisclosed Sparsh HTMT, Mphasis, IBM Daksh, TeleTech India Mphasis Sparsh Sparsh Dialnet Communications 5 years 4-5 years 3-5 years 3 years 3 years Based on the duration of the show 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 Private & Confidential
Slide 20: Evidence of institutional interest is already seen in the market; We expect at least 3 out of top 10 players to consider a strategic or financing transaction in the next 18-24 months RECENT TRANSACTIONS IN DOMESTIC BPO Year 2007 2007 2007 2007 2006 2006 2005 Acquirer 3i Infotech Aegis Motilal Oswal Intelenet Aegis Aegis Intelenet Target Linear Financial & Management Systems g y Teletech India (A JV between Teletech & Bharti Airtel) RT Outsourcing Sparsh BPO Customer First Orion Sparsh BPO (Domestic BPO business of Spanco Telesystems) Nature of Transaction Acquisition q Acquisition Investment Open offer (for 20% stake) Acquisition Acquisition Acquisition Deal Size (in USD M) 3 13 8 16 NA NA 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 Private & Confidential
Slide 21: 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 Oligopolistic market str ct re within the 3rd part vendor landscape; top 12 pla ers acco nt for 75% of the third part structure ithin party endor landscape players account party domestic BPO revenues in FY2008 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 *FY follows April-March cycle 21 Private & Confidential
Slide 22: Appendix A: Profile of Key Players Private & Confidential
Slide 23: Profiles of Key Players in the Indian Domestic BPO Market • Overview: Subsidiary of Essar Group, p y p providing g multichannel customer relationship management, including contact center, database management, analytical services and market intelligence. • Locations: Bangalore, Chandigarh, Chennai, Cochin, Coimbatore, Delhi, Hazira, Hyderabad, Kolkata, Mumbai and Pune • Employees*: 10,000+ • Overview: Provides customer acquisition and retention services • Locations: Mumbai, Delhi, Pune, Chennai and Bangalore • Employees: 3,600+ • Overview: One of the largest BPO service provider in India offering voice based services (inbound & outbound), transaction processing in CRM and F&A service lines • Locations: Bangalore, Chandigarh, Gurgaon, Kolkata, Mumbai, Pune and Vizag • Employees*: 20,000+ • Overview: A leading provider of customer lifecycle management solutions across BFSI, Telecom BFSI Telecom, Healthcare and Media verticals • Locations: Bangalore, Chennai, Hubli, Indore, Kochi, Kolkata, M umbai, Pondicherry and Trichy • Employees*: 15,000+ • Financials: (FYE March07): $186.6Mn# • Overview: A Hinduja group company, it is one of the leading providers of inbound contact center services & transaction processing • Locations: Bangalore, Chennai, Durgapur, Hyderabad, Mumbai and Mysore • Employees*: 11,000+ • Financials: (FYE March07): $39.3Mn# • Overview: One of the largest independent ITES companies in India, providing customer contact, contact direct marketing loyalty and fulfillment marketing, programs • Locations: Bangalore, Chennai, Delhi, Gurgaon, Hyderabad, Ko lkata, Mumbai and Pune • Employees: 8,100+ 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 Private & Confidential
Slide 24: Profiles of Key Players in the Indian Domestic BPO Market contd. •O Overview: Th BPO A of K k i G i The Arm f Kankei Group of f companies, providing voice-based services (inbound & outbound), SCM, direct marketing & CRM services • Locations: Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune • Employees: 2,500+ • Overview: A subsidiary of EDS providing contact EDS, center solutions to telecom sector • Locations: Ahmedabad, Bangalore, Noida, Pondicherry and Indore • Employees*: 17,000+ • Financials (FYE March07): $ 302.7Mn# • Market Cap (21/11/2007): $1.1Bn p( ) • Overview: Part of MCorpGlobal group of companies and is engaged in providing domestic contact center services to travel and telecom sector • Locations: Bangalore, Chennai, Delhi, Hyderabad, Kolkata, Mumbai, Noida and Pune • Employees: 3,000+ • Overview: Subsidiary of Reliance Communications, Communications providing customer life cycle management & customer contact solutions • Locations: Navi Mumbai and Chennai • Employees: 7,800+ • Overview: A Tata Enterprise and a wholly owned subsidiary of T t S b idi f Tata Sons Ltd providing b th voice & Ltd., idi both i non voice based BPO services. • Locations: Hyderabad, Mohali and Pune • Employees: 3,500+ • Overview: Domestic subsidiary of Intelenet Global Services (P) Ltd., providing customer contact, transaction processing services • Investor: The Blackstone Group • Locations: Bangalore, Chennai, Gurgaon, Kolkata, Mumbai and Pune • Employees: 6,500+ • Financials (FYE March07): $ 22.1Mn 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 24 Private & Confidential
Slide 25: Contact Details DEBAJIT SAHU ADITYA KHURANA Email: debajit.sahu@avendus.com Landline: +91-22-6648 0983 Email: aditya.khurana@avendus.com Landline: +91-22-6648 0981 This report should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. Recipients of this report should conduct their own investigation and analysis including that of the information provided. The information contained in this report is based on the information available with the company. Wherever information is sourced from a public source, the same has been quoted. The advice / recommendations rendered in this report is merely recommendatory in nature and not binding. Any decision or action taken by the recipient based on this report shall be solely and entirely at the risk of the recipient.. Opinions expressed are our current opinions as of the date appearing on this material only. No part of this material may be (i) copied photocopied or duplicated in any form by any means or (ii) copied, photocopied, redistributed without Avendus Capital Private Ltd.' prior written consent. AVENDUS CAPITAL IL& FS Financial Center B Quadrant, 5th Floor, Bandra Kurla Complex Bandra East, Mumbai 400051 India Landline: +91-22-6648 0050 +91-22-6648 0950 Website: www.avendus.com 25 Private & Confidential