‘Organic growth is the way for us’

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: The rupee appreciation against the dollar is reason enough to depreciate the spirits of anyone connected with the Indian BPO industry. For Rohit Kapoor, co-founder and chief operating officer of New York-based EXL Service, it is a big worry. However, Kapoor is working on a contingency plan. In an interview with Surabhi Agarwal, the IIT/IIM alumnus shares his current fears and future plans. Excerpts:

How much has the rupee appreciation hurt you?

It certainly impacts all our costs because we have close to 65% of our costs in rupees. Obviously, it becomes a lot more expensive. But, apart from the dollar-rupee movement, how sterling pound and other currencies move against the US dollar and the rupee is also important to us. Almost 50% of our revenues are denominated in pound sterling and the balance 50% is in US dollars. This year, the rupee has appreciated close to 10% against the dollar but pound hasn’t appreciated that much. So we are somewhat protected. The other element is that some of our contracts are on a currency neutral basis.

How should one deal with the rupee appreciation?

The way we think about dealing with it is by focussing on three or four key measures. First, we will change our customer contracts in such a manner that we protect ourselves from the currency appreciation and pass on some of these foreign exchange adverse rate movements to our customers through a price increase.

Secondly, we diversify our cost structure. For example, we are looking at expanding into the Philippines, Eastern Europe and getting into other regions so that it is not only the rupee appreciation against the dollar, but also the movement of the European currency against the dollar. The third way for us is to hedge the foreign exchange risk and we are looking at longer-term foreign exchange hedges, which are being put into place.

Currently, we take a hedge anywhere between six to 12 months of our revenues, but we are looking at increasing that from 12- 20 months. That will provide us with some further protection. The fourth way is to get into business lines that have less of a currency exposure. Doing some domestic BPO work will not involve any currency exposure.

Are you entering the domestic BPO market?

We think that the domestic Indian BPO market is going to be a large market. And we want to focus on areas where we have domain expertise so that we can bring in incremental value to our customer relationships in India.

Insurance, banking and financial services clients contribute the maximum towards EXL’s revenues. Are you looking at only these sectors?

If you take a look at the evolution of EXL, it’s been a very focussed company. We used to drive about 70% of our revenues from our banking, financial services and insurance. However, as we grow, it’s likely that we will diversify into other verticals.

Are you looking for acquisitions in Eastern Europe?

We are going to expand into two geographies in the next year. The Philippines will be the first one. We want to set up a green field operation there. We want to build our own capability there and service our existing clients with an expanded service outfit as well as target new customers. We also want to expand into Eastern Europe. We believe that the preferred way to expand into Eastern Europe is through an acquisition. So, we are looking at various options so that we can integrate an existing provider into our business.

But till now you have grown organically. Are you changing the strategy now?

At the end of the day, a healthy business is one where organic growth rate is fundamentally strong. Acquisitions are meant to add to the core business of the company. So, when we acquire, it is either to fill in a gap in the capabilities or the exclusives that the company has. So, it should be able to give us access to a new geography or to a new customer base. The principal way of growing for us is the organic way. Many companies that are going for many acquisitions are looking at size and scale. But the issue and the challenge really is the ability to integrate people and businesses. If you take a look at the IT services industry, leading players like TCS, Infosys and Wipro grew primarily through the organic route. You can also take a look at the numerous examples of roll-ups of the Indian IT services and in most of the cases they have been unsuccessful.

Asia-Pacific region is becoming hot for outsourcing? What are EXL’s plans for the region?

At this stage of the evolution of the company where our growth rate is in excess of 30-40% per annum we are much more focussed on our core markets, which is the US, the UK and Europe. We are not proactive in targeting the Asian market. However, we do have some engagements with clients in the Asia-pacific region. Theses are small, though. And we will selectively and opportunistically focus on them. But in terms of building up a sales forces and targeting clients, we think the market opportunity in the US and the UK is so huge that we should focus there at the present.

Aviva is reported to contribute 30% of EXL’s revenues. How are you dealing with their exit?

With Aviva we have two contracts. One is a five-year outsourcing contract, which is a third party contract. The second contract is structured as a BOT (Build-own-transfer) contract. For the BOT contract, the earliest that Aviva can give us notice is January 2008. We don’t know when and what their decision is going to be and Aviva will let us know over the next few months as to what they want to do on that. But even if they do exit, it affects 15% of our revenues. Since we are growing at 40%, we will still continue to grow , but may be at a much slower rate.

There has been a lot of talk about giving a separate industry status to the BPO industry. Is it desirable?