A new bet on outsourcing

Indian firm WNS Holdings offers fresh outsourcing investment opportunity. By Grace Wong, CNNMoney.com writer July 23 2006: 2:58 PM EDT

NEW YORK (CNNMoney.com) -- Investors will have a chance to bet on a new sector of the outsourcing market when Indian firm WNS Holdings makes its market debut on the New York Stock Exchange this week.

Instead of merely providing IT or software services, plantay-based WNS handles entire business functions like loan processing for banking clients and providing customer service for airlines.

Outsourcing may be a political hot button, but demand for these so-called business process outsourcing services is booming. The global market is expected to grow to $641 billion by 2009 from $422 billion in 2005, according to market research firm International Data Corporation.

Technology outsourcing firms Infosys (Charts) and Wipro (Charts) also operate BPO units, but WNS would be the first firm solely focused on BPO services to go public, according to Ashish Thadhani, an analyst at Gilford Securities.

"WNS would become the first pure-play in one of the fastest growing industries in India, which is one of the fastest growing economies today. That puts the importance of the offering in perspective," he said.

WNS has said it plans to sell about 10.4 million American Depositary Shares to underwriters -- 4.47 million from the company and about 5.96 million from existing shareholders. It aims to start trading on the Big Board as early as this week under the symbol "WNS."

WNS expects its ADSs to price between $18 and $20 a share, which would value the total company at about $756 million. The company expects to raise about $74 million from the offering, after deducing underwriting costs.

Private equity firm Warburg Pincus holds a controlling stake in the company and is expected to remain a majority shareholder after the offering. British Airways is selling nearly all of its 15 percent stake in the firm. Booming business

While shares of Indian outsourcing firms have stalled this year -- in part due to the broad downturn in emerging markets -- they've racked up huge gains over the longer term. (See chart)

"The outlook for the offshore market is pretty strong. Across the board all types of outsourcing business models are really booming," Joseph Vafi, an analyst at Jefferies & Co., said.

Revenue has steadily grown at WNS. The company said sales rose to $202.8 million in the fiscal year ended March 31, up 25 percent from the year-ago period.

But the company has struggled with its bottom line. It reported net income of $18.3 million for the most recent fiscal year, versus a $5.8 million loss a year earlier.

And while WNS serves a diverse group of clients -- including Virgin Atlantic Airways, insurer Marsh and British grocer Tesco -- its five largest clients accounted for a staggering 41 percent of its revenue in the most recent fiscal year.

An even more worrisome challenge facing the outsourcing industry: the escalating concern over the security of personal information.

Publicity over recent cases of theft of sensitive client data could discourage clients from using offshore providers, WNS said in its prospectus.

But Thadhani from Gilford Securities said the outsourcing industry is keeping a close eye on security.

"This is an area of priority for the industry, and the relative infrequency of incidents is a good sign," he said.