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Bill Simpson published the analysis below of ExlService's (NASDAQ:EXLS) IPO for subscribers on October 11th. The company priced 5 million shares on Friday (Oct. 20) at $13.50 a share and closed today at $18.29. The text of the original write up follows:


ExlService plans on offering 5.75 million shares at a range of $10- $12, assuming over-allotment is exercised. Citigroup and Goldman Sachs are lead managing the offering, Merrill Lynch and Thomas Weisel co-managing. Post-offering EXLS will have 28.25 million shares outstanding for a market cap of $311 million on $11 pricing. 20% of IPO proceeds will be utilized to purchase preferred shares and repay insiders, the rest for general corporate purposes.

Post-offering Oak Hill Capital Partners will own 35%+ of EXLS. Senior management will own 20%+ of EXLS post-offering.

From the prospectus:

“We are a recognized provider of offshore business process outsourcing services, primarily serving the needs of Global 1000 companies in the banking, financial services and insurance sector. We provide a broad range of outsourcing services, including business process outsourcing services, research and analytics services and advisory services. The business process outsourcing services we provide involve the transfer to us of select business operations of a client, such as claims processing, finance and accounting and customer service, after which we administer and manage the operations for our client. “

This is the 2nd Indian outsourcing IPO we've seen recently. The first has been the hugely successful WNS offering. BPO(Business Process Outsourcing) IPOs in general have done quite well, so that is reason alone to look closely at EXLS. We've seen onshore/offshore BPO firms run successful offerings the past couple of years including PSPT/WNS/INWK.

Since EXLS began operations, they've transferred more than 225 processes from 22 clients to EXLS operations centers. Most of EXLS outsourcing business to date has been focused on the banking, financial services and insurance sectors. These 3 sectors accounted for 85% of 2005 revenues. EXLS has 7800 employees Three largest clients are Norwich Union, American Express, and Dell(including Dell Financial Services).These three accounted for 63% 2005 revenues with Norwich accounting for 39% by itself. Each is under contract until at least 2009. Contracts typically range in length from 3-7 years.


BPO (Business Process Outsourcing) has been a worldwide trend. Companies can save salary and benefit costs by utilizing BPO firms to handle various operating segments. As EXLS puts it: 'BPO providers work with clients to develop and deliver operational improvements with the goal of achieving higher performance at lower costs.' Due to the large amount of time/effort/expense involved, when a company shifts to a BPO firm, it is usually with the idea of it being a long term relationship.

Offshore BPO is expected as a sector to grow 37% annually over the next 5 years to $55 billion by 2010. Banking and insurance are expected to make up 50% of this offshore BPO business. India outsourcing companies accounted for 46% of offshore BPO revenues in 2006. The Indian BPO business is expected to grow evenly with the rest of offshore BPO. Indian BPO's projected to have approximately 45%-50% chunk of that anticipated $55 billion in 2010 revenues.

EXLS recently acquired Inductis, a provider of research and analytics services. the acquisition closed 7/1/06 and EXLS is planning on using Inductis to grow into more outsourcing segments then Banking, Insurance and financial services.


3 1/2 X's book value at $11.

$2 per share in cash post-offering, no debt.

When factoring in the Inductis acquisition, 2005 revenues were $95 million, a 58% increase over 2004. Through the first 6 months of 2006, revenues appear on track to hit $125-$130 million, a 34% increase over 2005.

EXLS shifted into profitability in 2004. Gross margins the past 18 months have been 37%. Operating expense ratios have actually been ticking up, 27% in 2004, 28% in 2005 and 30% through first 6 months of 2006. This is mostly due to stock compensation expenses added in as EXLS got closer to IPO stage. However EXLS does note that a portion of this ratios growth is due to rising wages in India. Ideally you want to see operating expense ratios declining as revenues grow, we'll need to keep an eye on this ratio going forward with EXLS.

EXLS has a 10 year tax holiday which will not expire until 2010. With debt paid off on IPO and with no taxes, operating margins will equal net margins for EXLS through 2009. Operating/ net margins were 10% in 2005. Earnings per share were $0.33 per share. On an $11 pricing EXLS would be trading at 33 X's trailing earnings.

Through first 1/2 of 2006 operating/ net margins are down slightly due to the increased operating expense ratio. That should improve a bit the back 1/2 of the year; however I would expect margins to be a bit lower for full year 2006 then 2005. I would expect the bottom line to hit roughly $0.40 in 2006. On a pricing of $11, EXLS would be trading 28 X's 2006 earnings.

To really grow the bottom line, EXLS is going to need to bring in a 4th big revenue generating client.

Comparing EXLS briefly with two recent offshore BPO's WNS and PSPT:

EXLS, $311 million market cap on an $11 pricing. Trading 2.4 X's 2006's revenues and 33 X's '06 earnings.

WNS, $1.07 billion market cap. Trading 4 X's revenues and 46 X's 2006 earnings. WNS priced at $20 this summer and currently trades over $30.

PSPT, $349 million market cap. Trading 5 X's revenues and 31 X's 2006 earnings. PSPT IPO'd at $7 in 2004 and currently trades $18 1/2.


EXLS is going to need a few more contracts going forward they're heavily dependent on three clients. The big risk to this deal would be if EXLS not only does not bring in a new client, but losses one of their big three. Also Norwich has the option to purchase certain EXLS facilities in 2011. These would be facilities that service Norwich and accounted for 20% of 2005 revenues.


Notice the lofty multiples WNS/PSPT carry. This has been a very good sector to be and the growth going forward should continue to be strong. EXLS is coming public in the 'right' space. Is it the 'right' company? EXLS will need to bring in another large client or two over the next couple of years to justify appreciation from IPO price. With the India BPO businesses growing so quickly the odds are pretty favorable that will occur. Really all one needs to look at here though is large Indian BPO firm WNS IPO. WNS priced strong and is currently up 50% from pricing in just under 3 months. EXLS looks solid enough to recommend just on the WNS performance.

There is demand for these offshore BPO stocks and I would expect EXLS to do well short and mid-term. Recommend.

Disclosure: At the time of publication, was long EXLS from $16