Nov 162012

CESC Buys Firstsource-A Contrarian view

Those of you who have been following the stock market in general and BpO business in particular would have noticed the headlines that RPG group company CESC buys Firstsource (Controlled and managed by Sanjiv Goenka). As of now CESC  has agreed to buy 49% of Firstsource Limited and also make an open offer for another 25%. This will bring down stake of ICICI which has been trying to find a buyer for some time due to RBI guidelines.The stock markets have not looked at the deal in a benign way and CESC stock went down by 15% and Firstsource also not responding in a positive way. So most people think it is a lose- lose situation for both the companies.We would like to be contrarian here and actually think that this deal may work out in the next 2-3 years.

Disclaimer: We do not own stocks in any of the mentioned company as of today and this post is not a recommendation to buy or sell the stock.

In our post about the Winners and Laggards of the BPO business we mentioned that we will analyze Firstsource once the results are out and now is the right time to look at their numbers.

Headcount wise Firstsource has 32365 employees of which 10188 are outside of India, the data disclosed does not mentions the breakup of countries where these 10K employees are. These 32365 employees add an annual revenue of around 500 million USD, making it second largest BPO company out of India after Genpact, both employee strength wise and annual revenue wise.  The per employee revenue comes out to be USD 8.38, slightly better than WNS. But the difference is that Firstsource still has 10K employees outside of India and if it can change that mix even by 10% its profitability should change. Though it has an uphill task to increase the revenue per employee, but let us not forget it h as a lot of domestic business also where the realization is less but so are the salaries of employees.

The other difference will come in form of stable parent, it has been in news for 2 years now that ICICI is planning to sell its stake in Firstsource due to RBI guidelines and this has led to slow but steady ouster of top management in last few years, right from Ananda Mukerji, to other senior people.  Every time a senior person leaves it leads to continuity issues and loss of focus in the junior employees. Now with a stable parent in form of Sanjiv Goenka controlled CESC, the employees as well as customers should take a sigh of relief and get back to the business.

Impact on Employees: We agree there is no synergy between CESC and Firstsource but let us not forget CESC will not manage Firstsource but remain a holding company taking financial decisions while the day-to-day management will be with Firstsource management current or future that remains to be seen. The management  definitely will have to get used to work with an Indian business house and cost cutting will be in focus ( share holders should be happy about it and the employees respect the same if they want to prosper in long run).

Long term positives: So we will stick our neck out and say that in next 2-3 years this deal will work out well for both Firstsource and CESC till then it will be a lot of focus on cost and revenue and employee mix from different geographies and increasing the $ revenue realized per employee. The  bench mark set by Genpact is pretty high and all the other BPO companies have a tough climb ahead.

Note: We have not contacted any of the companies mentioned in the post and data is taken from Firstsource website.


 November 16, 2012  Posted by at 11:25 AM Business of BpO, Case Study Tagged with:

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