This is how it all started plain vanilla type Call centers mushroomed in the outskirts of Delhi, to take advantage of the low cost English speaking Indian graduate, a legacy that we can thank the British for. Very soon it became a buzzword and when Nasscom in association with Mc Kinsey came out with a report on the potential of the Business Process Outsourcing (BPO) Industry the czars of Indian Software who were till then mesmerized by the rise and fall of the internet bubble took another look at this yet another prodigy of the digitized world. Infosys set up Progeon, while Wipro gobbled up Spectramind at US $100 million. Nobody wanted to be left behind but the early mover advantage stayed with the Companies that dared to make the first move (more on that later).

Over the last 5 years the Indian BPO Industry has grown at a mind boggling pace of close to 70%. From an Industry size of US $ 565 million in 1999 - 2000 revenues have exploded to US $ 2.4 billion in 2003 - 04. While the industry grew at rocketing speed companies also graduated to delivering higher end value jobs ranging from financial analysis to engineering automation and designs. The low end Medical transcription business died on the way as lack of entry barriers encouraged new entrants to drive down rates to below US $ 7 an hour. Amidst the fear of the depreciating dollar and the BPO backlash bills that frequently make it to the headlines of all the pink papers the BPO juggernaut has rolled on quite well.

This year when the US President signed on a couple of Anti - BPO bills in view of the approaching elections history was made. For the first time US Presidential elections would be fought on issues relating to a third world country, a country, which till the late 1960's was unable to feed itself, a country which was known as the land of snake charmers. In a recent election meeting John Kerry labeled all Companies outsourcing jobs as "traitors". The Americans as they say are right now terrified by only two things in the world Osama-bin-Laden and off shoring of work to India. - While one takes away life from them the other is certainly making their living difficult.

Federal outsourcing contracts do not make up even 10% of the total BPO revenues of Indian companies. Majorities of Indian companies feel that these bills are more for the elections then for the US Industry. The Indian BPO Industry is taking no chances and Narayan Murthy Chief Mentor of Infosys opined that if the Indian BPO Industry is to co-exist amidst the backlash a move up the value chain is desired. The era of generating BPO growth through plain Call Center jobs is nearing an end.

"Simple base level back office payroll and data entry will get to rock-bottom-wage over time and countries like India will move up the chain and take on more complex software and product development services," John McCarthy, an analyst with Forrester Research.

Why is Uncle Sam perturbed with off shoring? It is estimated that by 2015 around 3.3 million US based BPO jobs will move off shore from the US the number of US service jobs lost to off shoring will accelerate at a rate of 30 to 40 percent annually during the next five years The February 2003 cover of Business Week asked, "Is your job next?"

The yawning wage differentials are encouraging corporates to outsource their labor-intensive jobs to countries like India where labor is cheap, intelligent and possesses a very short learning curve..

The Mc Kinsey Global Institute study shows, that for every dollar that was previously spent on business processes in the United States and now goes to India, India earns a net benefit of at least 33 cents, in the form of government taxes, wages paid by US companies, and revenues earned by Indian vendors of business-process services and their suppliers.

What is the Uncle overlooking?

It has been further researched that every dollar of job out sourced to India generates a potential saving of US $ 1.12 to 1.14 for the US Economy. Also the population of the United States is aging. At current productivity levels, it is estimated that 5 percent, or 15.6 million more workers will be needed by 2015 to maintain its current ratio of workers to the total population at the present standard of living. By 2015, despite current fears about job losses as a result of off shoring, the US economy will need more, not fewer, workers. Off shoring is surely the way out.

How can you benefit?

There are just two ways to benefit from a booming Industry either a person sets one for himself or he chooses to work there. Neither does he have the resources to set up a BPO outfit of any reasonable critical mass nor can he leave his job to participate in a training program where they pronounce schedule as skedule and keep the "t" silent at the end of a word, for instance a credit card will be pronounced as a Kredid Kard.

While the larger BPO players like GE (employees of over 10,000) and Stanchart are unlisted the only option left for investors is to acquire part ownership of the listed entities having significant share of revenues from BPO operations. It is imperative to note that while the bigger sounding names like Progeon and Spectramind would grow at scorching speed their contribution to sales of their holding companies Infosys and Wipro would be immaterial.

Ranking Methodology: The present year ranking is based on US GAAP revenue (removing `Pass Through Costs' that may be included as a part of revenue) reported by NASSCOM member companies The ranking exercise excludes captive units.

* Expected to be significantly ramped up from 1400 in view of the new facility at Bangalore

** Although substantial revenues flow in from the software division the BPO subsidiary is the

growth engine of the company

*** All companies are debt free.

E Serve International

This Citibank subsidiary is the best play on the Indian BPO sector Recently the company hired a lot of MBA's and lawyers for it new Chennai facility. The parent (Citibank) bought over 7,20,000 shares at Rs 600 last year. When the parent buys back shares you do not require an analyst to come out with a buy report. E-serve pays 30% tax on its profits; a figure that is estimated to significantly drop in the coming years. Any savings on this count will certainly be a bonus and boost the bottomline further. At about 20 times current year and 16 times next year, with phenomenally high Return on Capital Employed at 83% this Company is surely investment worthy. The strong parentage will ensure steady flow of orders. The sole concern is the high dependence on Citibank and since the parent does not hold 51% stake the financials of E-serve would not be merged with it. Any decline in Citibank's profits would induce the parent to squeeze margins from its subsidiary.

Hinduja TMT

This is a classic case of convergence with embedded businesses in BPO, telecom and media . Hinduja TMT (HTMT) is the second largest company in the health care segment of BPO. Client Concentration is an area of acute concern. Even though the Company enters into longer-term contracts (2 to 3 years) the risk though diluted is existent. The employee strength is expected to be substantially ramped up from 1400 as the company plans to use its new 80,000 square feet facility at Bangalore. . The ratio of non-voice data at 66% fares quite favorably when compared to its peers. The operating margins at over 40%, is high, and the management expects it to stabilize at realistic levels in the near future. As a precaution to the depreciating dollar HTMT entered into a Rupee contract in December 2003 with one of their large Insurance clients. At under 13 times FY 04 earnings the Company appears cheap.

A casual look at the Company's Balance Sheet reflects the hidden jewels that it is sitting on. A 20% stake in Fascel ( telecom arm of Hutch for Gujarat Circle) works out to a 6% effective ownership in Hutch. While Bharti Tele (owners of the Airtel network) is available at an enterprise Value of Rs 30,000 crs conservative estimates value Hutch at 12000 crores (40% of Bharti Tele). The HTMT telecom stake effectively works out to Rs. 720 crores or Rs 180 per share The Hutch IPO later this year will assist in unlocking value. That leaves the fast growing BPO and the Cable TV businesses at Rs 75 per share. Recently its cable subsidiary InCable entered into an agreement with Kudeiski SA, a listed company of Switzerland, for issuing up to three per cent of its equity based on a valuation of approximately $500 million (Rs 2300 crores). The implementation of the Conditional Access System will certainly provide a shot in the arm to InCable subsidiary. Is the market missing something?

Mphasis BFL

Mphasis is among the early movers in the BPO segment. At slightly over 20 times current year earnings and a relatively lower Return on Capital Employed of around 8% Mphasis does not look cheap but the vision brought by Jerry Rao to enter the BPO business in the nascent stage seems to have worked well for this company. Unlike E serve and Hinduja TMT MsourcE boosts of a diversified clients base and employs more then 4000 people. However the concern is the higher ratio of voice to non-voice segment of activity where experts estimate margins to be subdued.

The management says that the BPO unit is still on the thresh hold of achieving critical mass and once that happens the take off would be smooth and swift. Rao further adds "You build up a lot of capacity in one quarter, which then gets deployed as revenue in the next".

If you are still skeptical on these BPO companies because of the dollar depreciation and the margin squeeze take a look at Tata Telecom - another play on the BPO sector. The company is a large importer of hardware and telecom components and a weak dollar will surely help. It has a tie up with Avaya of the Philippines and supplies all critical equipments needed for the BPO Industry. In the great California Gold rush people who chose to sell pick axes and shovels made fortune. Locating Gold was not certain but it was certainly important to buy tools if you wanted to look for Gold. At a price of Rs. 215 and an earning multiple of about 9 times for Fy 04 the stock looks compelling. On a market capitalization of about Rs. 300 crores you may not go wrong on this one.

Sources: Nasscom, IDC and Mc Kinsey reports.

Basant Maheshwari is a Cost Accountant and a Post Graduate Diploma in Equity Research and Analysis from ICFAI (Hyderabad). He holds E Serve and Hinduja TMT and recommends long term investors to buy at present levels and use declines as an opportunity to increase holdings. Although the stock appears attractive, the basis of assumptions on which this report is prepared may or may not happen As always readers are expected to consult their financial advisors and exercise their own judgment in deciding whether to buy or sell this stock Comments are invited at & .