Having notched up an excellent Q4 and FY11 performance (see EXL excels), number two offshore BPS pure play EXL Service, has started the new financial year in more subdued fashion. EXL is now seeing pressure on margins just like rivals WNS (see WNS margins take a dive) and Genpact (see Genpact stellar growth, but margins slide). Operating margins for the quarter ended 31 March fell 30 basis points to 10.0%, but quarter on quarter (qoq) were 240 points down.
This was blamed on a combination of factors – a decline in EXL’s transformation services business, 8% depreciation in the Indian rupee since the year end, and slower outsourcing decision making. The headwinds have already driven management to narrow its revenue guidance to the lower end of expectations – so $445m (still 24% up on FY11).
Even so, headline revenue for the quarter still grew an impressive 43% to $104.6m, (up 2% qoq), which includes both organic growth and revenue from the acquisitions of US-based insurance subrogation business Trumbull Services and Outsource Partners International (see EXL pays $91m for F&A specialist OPI). By our estimates, EXL should still be making very healthy 20%+ organic growth.
The decline in EXL’s transformation business (down 7% yoy and 5% qoq) is a genuine surprise since this is a high growth space right now as clients look to their BPS providers to support them in higher value services such as business process analytics. Genpact in particular is seeing growth of 60%+ in its equivalent Smart Decision Services practice. EXL’s transformation practice provides decision analytics, business process re-engineering and governance, compliance and risk services, so should be benefitting from this trend. Management is confident that this is just a one-off, and certainly we would expect to see this part of the business to be performing far better.