They are part of the same outsourcing industry, yet overseas investors seem to prefer

RELATED ARTICLES IT stocks fall as Cognizant lowers 2012 guidance

pure-play BPO firms to IT service stocks.

A look at the year-to-date performance of foreign-listed shares of pure-play BPO firms as well as IT service companies (which employ a significant number of Indians) shows that the value of BPO firms like the London-listed iEnergizer and its US-listed peers like Syntel, EXL, Genpact andConvergys have given decent returns so afrin 2011.

In contrast, the value of IT service firms like Infosys, iGate, Patni, Cognizant and Wipro have dropped. In some cases the drop was as much as 30 per cent. Analysts feel that IT services are hit due to macro-overhang and early- cycle benefactors, while BPO firms enjoy the general perception of being a late-cycle play on recovery in IT spending with offshore penetration levels on the rise.

Numbers tell the story better. After a stupendous 150 per cent rise in 2009 and 62 per cent gain in 2010, the stock of Cognizant is down nearly one per cent in 2011. The Nasdaq-listed American depository receipts (ADRs) of Infosys gained 124 per cent in 2009 and 38 per cent in 2010 but have dropped 16 per cent in 2011 so far.

This trend is repeated for the NYSE-listed Wipro ADRs (down 14 per cent in 2011), iGate (-16 per cent) and Patni (-30 per cent).

TCS has no overseas listing while its BSE-listed shares have been flat this calendaryear.

Barring Mahindra Satyam, which is seeing better days in terms of management and growth, overseas investors are clearly selling the titans of IT services.

Most IT service firms that are into silent period ahead of the June quarter earnings refrained from comment. Analysts were much more forthcoming. “I think the main reason for the divergence is that IT firms had a very strong stock performance and very strong financial growth quite early in the economic recovery and are viewed as more early-cycle stocks,” said David J Koning, analyst at Robert W Baird & Co. He added that most of his ratings on IT service stocks were neutral while those for BPO stocks were ‘outperform’.

While demand for offshore IT services remains healthy and the dollar-denominated revenue growth in 2011-12 is seen at 18- 25 per cent for top for IT service vendors, decibel levels have recently gone up on the sovereign debt crisis in Europe and slowing the pace of economic growth in the US. Hitesh Shah of IDFC Securities feels that micro- demand indicators (pipeline, sales cycle, win rates, etc) as also management commentaries from Indian and global technology majors still point to sustained growth in demand.

“We do not see growth at risk unless the US economy gets into a slowdown or recession,” Shah of IDFC said. But overseas investors seem to be already getting uncomfortable about IT. On the other hand, BPO firms seem to be a more attractive option.

Shares of the London-listed iEnergizer, a Noida-based Indian BPO firm, are up 7.3 per cent. Investors in the US-listed BPO firms Syntel, EXL, Genpact and even Convergys (which has a big presence in India) have not lost any money in these counters in so far 2011. Syntel has gained over 20 per cent, Genpact 12.4 per cent and EXL 8 per cent. At 3 per cent in 2011, Convergys too has seen appreciation in its stock price. The only exception in the BPO pack seems to be WNS, which is down 22 per cent.

Many believe that BPO stocks are in a sweet spot. Manish Hemrajani, senior research analyst at Oppenheimer & Co, said, “BPO tends to be a late- cycle play on a recovery in IT spending and I believe we are in the second inning of that cycle. Additionally, Genpact and EXL have clearly benefited from their recent acquisitions of Headstrong and OPI, respectively.

WNS has company specific issues of high debt and low growth that haven’t allowed it to participate in the upturn. Optimism about Convergys is due to anticipation of a restructuring with a new CEO at the helm who has a history of divesting assets.”

Followed by a sharp recovery in IT spending in 2010 and given an improving macro- economic environment in the US, investors are positive on IT / BPO outsourcing, especially offshore vendors, as companies continue to manage costs closely. “IT spending saw a sharp rebound in 2010. Coming off a weak state of affairs in 2008- 09, the year 2010 was big for IT spending, driven by a strong demand in the financial vertical and continued push towards offshoring. The outlook for BPO is stronger now with large deals set to be won from existing as well as new clients. The stock performance may be showing that investors feel BPO will still get deals but IT may not, if slowdown comes again,” said a top IBM executive, who is not authorised to speak to media.