ExlService Holdings, Inc. (EXL), the Indo-U.S. business process outsourcing (BPO) company in less than a decade since it started operations has made a successful debut at NASDAQ Global Select Market, a segment of the NASDAQ Global Market (formerly NASDAQ National Market) with the highest initial listing standards of any exchange in the world. EXL is only the second pure-play BPO company in India after WNS Holdings to be listed at Nasdaq.

In the Volume 2, Issue 8 of The IndusView : India’s Industry insider we had discussed, Warburg Pincus, the largest private equity investor in India, made 13 times its initial investment when India’s largest independent Business Process Outsourcing firm WNS Ltd listed its shares on the New York Stock Exchange on July 26.

EXL had brought the initial public offer (IPO) at the estimated price range of $10-$12 per share, but finally the IPO was priced at $13.50 because of strong demand. It opened at $15.95 and closed the day at the intraday high of $18.84 on listing day of October 20, 2006, giving a return of 40% on the day one. EXL raised $67.5 million with the IPO of 5 million shares representing 18% stake in the company. EXL shares are traded on the Nasdaq Global Select Market under the trading symbol "EXLS". Global investment banking service companies Citigroup Corporate and Investment Banking, part of Citigroup and Goldman, Sachs & Co acted as joint book-running managers of the offering. Merrill Lynch, Pierce, Fenner & Smith Incorporated, part of Merrill Lynch Co. Inc., provider of capital market, investment banking & advisory services and Thomas Weisel Partners LLC, an investment bank focused on the technology, healthcare and consumer sectors were co-managers.

EXL is one of the few companies to have graduated from discrete single transactions to end to end functional solutions in the Banking, Financial Service and Insurance (BFSI) segment. During its early years the company was a captive offshore arm of the U.S. insurer Conesco but has since developed its reputation in this segment of the BPO service industry, providing value added services and strong industry experience.

After being incorporated in April 1999 by Vikram Talwar, then the CEO and Managing Director of Ernst & Young, world's leading professional services organization, EXL was acquired by Conseco in August 2001. Later, in November 2002, private equity firms Oak Hill Capital Partners L.P. and FTVentures that has $600 million under management along with some members of the senior management team bought EXL from Conseco making it a third party pure-play business process outsourcing service provider.

Although the company is headquartered in New York, its entire operational base is in India. It operates from five centers across Noida (near New Delhi, national capital city of India) and Pune (historical city in the western state of Maharashtra) with a total headcount of more than 7,500 employees. In July 2006, EXL acquired Inductis Inc., operating in the research and analytics domain with focus in the Financial Sector to boost up its research and analytics business.

Based on the closing price of $18.84 on October 20, 2006, the company is valued at more than $500 million. It had revenue of about $74 million in 2005, up from $27.7 million in 2003, registering a compound annual growth rate (CAGR) of 63%. The company has been profitable since 2004 and free-cash-flow positive since 2005. During the first half of 2006, revenue grew by 31% to $46.8 million.

A relatively young company like EXL is expected to grow very fast in the booming sector of the offshore BPO business. The overall offshore opportunity is estimated to be $55 billion by 2010 registering a compelling annual growth rate of 37%, according to a study by management consulting firm McKinsey & Company and NASSCOM, the industry body representing about 900 Indian IT companies.

The company plans to expand its operation by at least 2000 more seats and exploring new avenues in South Africa, East Europe and East Asia.

Near Future Risks

The risk that the company faces in the near future will involve challenges due to increasing competition in the BPO market with big and small players vying for their share of the market. It will therefore require management skills to steer the business to the next level of growth.

High sales concentration is another major challenge faced by the company. On a pro forma basis (including its acquisition of Inductis), five clients accounted for 77% of EXL's revenue in 2005 and U.K.'s largest insurance company Norwich Union accounted for a huge 38%. While customer concentration is common among emerging BPO players, most contracts are cancelable without penalty and on short notice.

In addition, EXL faces the potential loss of some business from its largest client in 2008, when Norwich Union has the option to take a substantial piece of EXL's current business in-house.