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 Insurance, Manufacturing, Transportation and Automotive. Finance,

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 coordination, 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 Income Expenditure Net income Profit before tax Income tax Net profit 2004 165.50 83.60 81.90 90.20 6.70 83.40 2005 187.90 171.00 16.90 10.70 -6.40 17.10 2006 252.20 209.00 43.20 33.90 -5.90 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

WNS Holdings 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 Suggested Reading Stock related Articles • • • • • • • • Chart Patterns and market’s reaction DLF IPO overview ICICI Bank IPO - India Street Analysis HDIL IPO Expected to be a Winner India’s BEML IPO Expected to Skyrocket Analysis of Everonn Systems India Limited IPO Omaxe IPO A Good Investment – The India Street Analysis How do IPO’s fare in Secondary Market?