When the subprime crisis hit in early August, the global contagion was largely limited to the banking sector in Europe and some parts of Asia. But while India's banks, which had little exposure to the crisis, were largely unharmed, some of its outsourcing companies are emerging as unexpected victims of the financial turmoil.
On Aug. 17, nearly a fortnight after the crisis struck, New York-listed WNS Global Services, one of India's fastest-growing business-process outsourcing companies, held a conference call for analysts. Chief Executive Neeraj Bhargava, told analysts he was lowering the company's forecast for the current financial year as business from First Magnus Financial and other distressed mortgage lenders was drying up.
In some cases that business won't be back soon. For example, Arizona-based First Magnus, which laid off 6,000 employees and filed for bankruptcy Aug. 21, is one of nine WNS mortgage-lending clients that have succumbed to the subprime crisis.
Bhargava said he estimates the loss of business from those lenders will lop $16 million from projected sales, which had been expected to come in at $307 million. The company also said net income before tax is expected to be about $26 million, lower than previously estimated. "It is just a temporary blip," said Bhargava, but investors were unimpressed. WNS shares fell 16% after the announcement and, at $18.25, stand at almost half their recent February high of $35.30.
Signs of Trouble Earlier in the Year
Mumbai-based WNS wasn't the first outsourcer to be affected. The first hint of trouble can be traced back to January at Bangalore-based iGate Global Solutions, which provides data analytics and loan application processing for mortgage, manufacturing, insurance, and retail clients.
At the time, the subprime meltdown had yet to take hold, but the company warned investors that clients like GreenPoint Mortgage were already cutting back on loans to customers and sending iGate fewer loan applications to process.
The outsourcer responded by reducing revenue forecasts for the first two quarters, accompanied by a prediction from Chief Executive Phaneesh Murthy that growth in its mortgage business would be stagnant. (GreenPoint filed for bankruptcy Aug. 20.)
Still, few would argue that outsourcers' subprime woes are catastrophic. Most have diverse client bases and mortgage lenders, while important clients tend to represent a relatively small proportion of the whole. At iGate, for example, the mortgage sector represents roughly 7% of total business; it was 10% before it lost GreenPoint's business. Mortgage lending makes up about 9% of WNS sales.
Largest Outsourcers Remain Unscathed
Just as important, demand for outsourcing services from other sectors continues to grow quickly. At WNS, despite the recent downgrade, the company continues to grow rapidly. In the last quarter, the company added 1,700 new employees, bringing its overall headcount to 16,000.
And CEO Bhargava said he will redeploy 500 staffers no longer needed to process mortgage loan applications to other accounts from the travel, banking, and financial-services sectors, which together account for about 80% of its business. "The demand for outsourcing and offshoring is so large that everyone is expanding," says Suveer Chainani, IT analyst at Macquarie Securities in Mumbai.
Another fillip is that the largest Indian outsourcers say they are largely unaffected by the subprime crisis. Among the biggest players, Tata Consultancy Services and Infosys say they have no cause for concern.
Faster Credit Collections
One reason is that the subprime problems, while attracting huge attention, haven't yet reduced business from the banking sector clients that use outsourcers for a wide range of back-office tasks. Financial services provide 43% of revenues at TCS, but it claims to have no business with banks or other institutions that are significantly exposed to subprime borrowers.
Infosys lists GreenPoint Mortgage as a client, but says the crisis is an opportunity to get new business. "When companies are looking to cut costs, they outsource more work," said Chief Executive S. Gopalakrishnan.
Nevertheless, outsourcers are now showing more caution in their dealings with clients. WNS, for instance, is collecting payments from clients faster than the usual 30-to-45-day credit period it used to offer.
