The Bank of America Securities-Merrill Lynch has painted a gloomy picture for the pure-play Indian BPO industry for they next year. In a recently released outlook note for the Indian BPO industry, the firm said that with factors such as drop in business volumes and bankruptcies among clients, besides an overall pricing pressure and competition from integrated players some BPO companies may cut profit estimates by as much as 55%.

The firm has forecasted a revenue growth of less than 10% for WNS, Firstsource and Genpact in FY10, while EXL will see a decline of 5%. “This is much lower than the growth we expected a few months ago, with deal closures getting delayed due to clients' uncertain business outlook. We believe protectionism worries could also result in deals getting pushed out,” the firm said in a statement.

Clients' reduced business impacting BPO volumes in discretionary services such as analytics/advisory services (around 20% of EXL's revenue and at least 10-15% of WNS's and Genpact's revenue) or customer care services in banking, insurance, airlines and telecom.

Also, mergers, acquisitions and bankruptcies have seen many clients disappear from the Indian BPO firms' radar. “First Magnus, a greater than 5% revenue client for WNS, filed for bankruptcy in 2007. Wachovia, a likely 4-5% revenue client of Genpact, was acquired by Wells Fargo last year, and we expect business volumes for Genpact to be impacted given Wachovia's business and integration challenges," the report said.

The brokerage expects WNS to fall short of its earlier estimate for revenue for the last financial year by 9% while Genpact and Firstsource, two other standalone BPO companies, are expected to perform inline as of 2009.However, even as it cut down its estimates, BofA-ML expects revenues to remain flat or even slightly higher in the current year and grow by 10-15% in FY 2011, led by Firstsource.

While BPO companies, like IT services firms, could have reaped a windfall due to the weak rupee, Merrill said most of the BPO players have hedged their revenues against currency movements, taking away some of the beneficial impact. "Since BPO companies typically hedge for longer periods than IT companies, given the longer-term nature of BPO contracts, we fear margin benefit is being offset by hedging losses," it said.