Rev growth at pure-play KPOs hurt by 2008 crisis

November 12, 2012

Fast growing pure-play KPO companies in the business and market research outsourcing segment in India saw a rapid deceleration in growth by a whopping 57 percentage points since the 2008 global financial crisis, a report by a business intelligence provider showed.

Until 2007, this segment in India prospered with enviously high revenue growth, good margins and returns. In fact, many top analysts were optimistic about its growth, some estimating a CAGR of 47% between 2007 and 2012 for the market research outsourcing industry.

However, annual growth rates dropped from 60% in 2007 to just 3% in 2011, the findings conducted by ValueNotes revealed. During this period, revenue increased at a CAGR of 14% to reach INR 3,786 million in 2011. In its report titled “Business and Market Research Outsourcing: High revenue growth muted by economic slowdown”, the company analysed the key financial ratios of pure-play service providers with operations in India, which specifically cater to the business and market research segment.

Arjun Bhuwalka, project manager at ValueNotes said, “We found that by 2011, companies in this segment had been impacted across various financial measures with revenue growth coming almost to a standstill, and revenue per employee decreasing at a CAGR of 0.5% in the five year period.”

To add to the downward spiral, returns on capital employed (ROCE) were almost wiped out during the economic slowdown. The ROCE of pure-play business and market research outsourcing companies in India was 45% in 2007. These returns, backed by even higher revenue growth rates, had made the segment an extremely attractive market for investors. However, things changed subsequently with ROCE falling to single digits in 2011.