Initially an outsourcing unit of the General Electric group, Genpact became an independent company about two years ago and now has more than 35 clients worldwide. It is looking to become the third Indian BPO firm to list in the US after smaller rivals WNS Holdings and EXL Service Holdings, which have been trading there since last year.
The offer comes on the heels of a string of large Indian equity deals that have all been extremely well received by international investors and have helped to refocus their attention on the Indian market. Among them is Housing Development Finance Corporation, which will be pricing its follow-on ADR offering of about $1 billion after the New York close tonight. Sources say there is no price sensitivity in the book and the deal can be expected to price tight to the current market level.
Genpact is selling 35.29 million shares, or 17% of the company, at a price between $16 and $18, according to its listing prospectus. Half the deal consists of new shares, while the rest will be sold by GE Capital and private equity firms General Atlantic and Oak Hill.
GE Capital will see its stake fall to 23.2% from 28.5% following the IPO, while the combined holdings of General Atlantic and Oak Hill will drop to 51.8% from 62.8%.
There is a greenshoe option to sell an additional 5.29 million new shares, which could increase the maximum deal size by 15% to $730.6 million and make a slightly bigger dent in the current holdings of these major shareholders.
Citi, Morgan Stanley and JPMorgan are joint bookrunners for the offering, which will be open for about 2.5 weeks to allow the management to meet with a broad group of investors. The final price is expected in the week of July 30 and the trading debut will be no later than August 1.
Genpact has grown rapidly since it became independent from the GE group in early 2005 after eight years as a captive business and has expanded its range of services significantly. It currently provides end-to-end solutions and services to its clients within banking and finance, insurance, manufacturing, transportation and healthcare and has more than 28,000 employees.
Last week the company was ranked as IndiaÆs largest provider of BPO and information technology enabled services (IteS) in terms of revenues for the second year in a row by the National Association of Software and Service Companies (Nasscom).
The company hasnÆt cut its ties to GE completely, however, as the US firm has agreed to provide committed revenues through 2013. In the first quarter this year, 71.5% of the top line income came from GE, although sources say the proportion of its contribution is expected to drop to 50% in 2008. This should be positive for Genpact as the services it provides to GE is growing at a much slower pace than the businesses generated by new contracts and clients.
One source notes that the 50% historic compound annual revenue growth increases to 74% when excluding the GE contribution. Another key selling point, he says, is the fact that GenpactÆs earnings have good visibility. The company has already about 80% of the contracts in place for next yearÆs business, which means it should be fairly easy for potential investors to attach an appropriate valuation to the stock.
The IPO price range values the listing candidate at between 29 and 32 times next yearÆs earnings, according to people familiar with the deal, which compares with 28.5 times for WNS and 25.5 times for EXL. This premium is seen warranted, however, as Genpact is the market leader and has much greater scale. Based on the mid-point of the range, Genpact will have a market capitalisation of about $3.9 billion, compared with $1.1 billion for WNS and $522 million for EXL.
Last year its net profit more than doubled to $39.8 million from $17.1 million in 2005, while revenues increased by 25% to $613 million. And the business opportunities for Genpact and other BPO specialists is expected to continue growing as more and more companies choose to outsource part or all of their operations to free up resources and to focus on their core businesses.
According to a report by Nasscom-McKinsey, the total market for offshore IT and BPO services amount to approximately $300 million, of which only about 10% has been penetrated. The report also projects that spending on offshore IT and BPO services will grow to $110 billion in 2010 from $30 billion in 2005.
Other marketing points will include the companyÆs diversity both with regard to geography û it has operations in nine countries and last year derived 20% of its revenues from outside of India û and types of clients. Its current client list includes insurance and risk management firm Aon, UK healthcare company BUPA, investment management firm BT Financial Group, Cadbury Schweppes, Honeywell, a US producer of consumer products, engineering services and aerospace systems, Nissan, Penske Truck Leasing and US bank Wachovia.
While bringing on board all these new clients, Genpact has retained the business culture and focus on teamwork and constant improvement of its processes that it adopted during the GE days. It has also kept a conservative business approach, which is evident by the fact that it still hedges its currency exposures in full for one to years forward as it argues that it is ônot in the business of currency speculation and simply does not want to worry about this,ö a source says.
WNF and EXL both gained strongly after their respective listings in July and October last year, topping out at 79% and 116% above their IPO prices, but have been on a declining trend since late February. Even so, WNS is still trading 40% above its initial offering price, while EXL is up 35%.