Goldman Sachs: India IT: ExlService (EXLS, Neutral, $21.60)

Visit http://indiaer.blogspot.com/ for complete details �� ��


ExlService (EXLS, Neutral, $21.60) 
 Balanced revenue strength driven by Outsourcing and Transformation – EXLS
highlighted that the company has registered positive sequential revenue growth over
the last six quarters, driven by growth in BPO and the Transformation segments. For
2010, the company continues to expect to finish at the top-end of its upwardly revised
guidance for revenue and margins. Into 2011 and longer term, it is targeting total
revenue growth of 25%-30% (15%-20% organic) and annual operating margin
expansion of 50 bp, driven by stable gross margins and increased SG&A leverage.

 Solid Transformation demand from both annuity and project based work – On the
Transformation side, business growth has surpassed the company’s expectations
driven by increased demand for annuity-based work (33% of segment revenue) in data
analytics and risk & financial management work due to regulatory changes, as well as
project-based work in marketing analytics and process re-engineering. From a margins
perspective, as the onsite mix is typically higher for transformation work, the
profitability is at the lower-end of the company’s portfolio.

 Stable Outsourcing growth from existing clients, focuses on cross-selling – On the
Outsourcing side, the company is seeing stable growth from existing clients, while it’s
been relatively more difficult to win new accounts given long sales cycles and higher
focus on projects with lower upfront costs. That said, the company believes that the
long-term secular growth for offshore BPO remains intact, as client penetration
remains low across both horizontal business functions and verticals. EXLS recently
made several changes and investments in its sales resources and is now much more
focused on driving cross-selling between its outsourcing and transformation clients by
leveraging a combined sales team. In addition, the company expects outcome-based
pricing (15%-20% of revenues currently) to provide incremental contribution to
revenue growth over the long term.

 Supply has not been an inhibitor of growth, wage inflation continues into 2011 –
EXLS noted that while employee attrition has increased across the industry, turnover
rates for middle management have remained relatively low for the company. The
company’s talent pool is largely localized, and getting the right talent has not been an
inhibitor for growth. Into 2011, management expects wage inflation could remain
elevated in the high-single-digit to low-double-digit levels, mitigated by
inflation/pricing adjustments that are embedded in over 50% of the company’s existing
client contracts.