Most cos have 70% exposure to US, forcing players to rationalise and diversify core businesses
SPECIALISATION can sometimes be a double-edged sword. India’s knowledge processing outsourcing (KPO) sector, pegged at a size of $1.5 billion and predominantly servicing the financial services market, may see some serious rationalisation, re-definition of core business, diversification, slowdown in client additions and M&A play in the next six to 12 months, analysts reckon.
Most KPOs have nearly 70% exposure to the US geography, which is reeling under history’s worst-ever economic crisis.
So, naturally, the heat will be on many firms that solely depend on activities like equity research and deal flow and research, says Ernst & Young’s Milan Sheth. Frost & Sullivan deputy director (ICT practice) Kaustubh Dhavse adds, “From 2002, there were many outsourcing organisations selling mortgages. That sort of business will not happen now. But, they will now look at diversifying into debt consolidation and debt management services.”
Market watchers say, many specialised boutique outfits are in the scanner of IT services firms. “Some of these firms have built strong capabilities in specific domains. That may be attractive for larger firms,” he said. Besides, valuations of these firms may be in the sub-$200-million range, that too at the higher end. According to Crisil estimates, the KPO industry size was $1.3-$1.4 billion in 2007-08 and is expected to grow five-fold to $5.3 billion by 2012-2013. It includes companies in areas such as credit and equity research, legal process and market research outsourcing firms.
Roopa Kudwa, MD & CEO, Crisil — which owns Irevna —, says: “The impact will not be on existing businesses, but newer client acquisitions will go slower. There will be a lot of reorganisation, re-alignment and that is going to slow down new client acquisitions, which we expect will pick up after a few months.” The momentum continues for the present, she adds. Irevna, which became part of Crisil in 2005, offers research services to investment banks and financial institutions globally.
Following the credit crunch and global turmoil, client firms are beginning to seek new types of research. In credit space, for instance, there is demand for deeper research in structured financial bonds. They want drill-down analysis till the lowest level rather than portfolio services. On the equity side, they are seeking to generate new alpha returns not linked to equity movements, Ms Kudwa adds. And, there is a huge opportunity outside this like high-end analytics in corporate treasury, retail and insurance.
Adventity, which has seen some churn in customers, maintains that overall business is still good. Says director and co-founder Vivek Arora: “There are a lot of distressed assets available. And there is a requirement for research and valuation services for distressed assets.”
While maintaining that the next 12 months would result in more opportunities for Indian firms, he said, Adventity had already taken the lead in diversifying into Middle East and Asia-Pacific markets. And, Irevna, which is expanding into Poland, has over a 1,000 people working out of Chennai, Mumbai, the US, the UK and Argentina.
Smaller players like Brickwork Ratings, a KPO-cum-credit rating agency promoted by former Karnataka IT secretary Vivek Kulkarni, have hedged their business by having a base of over 100 small clients. An IIM-B-incubated analytics startup, Marketelligent, is watching the global environment carefully and is focused on emerging areas like reactive and predictive analytics and is targeting a variety of domains and not just financial services.