We recently caught up with the management of EXLService. Our takeaways: demand for BPO remains healthy, currency crosswinds should offset each other, and valuation remains compelling at current levels. On the demand front, there has not been a slowdown in BPO deal activity or an elongation of the sales cycle. Currency will create a headwind on the top line, but should be neutral to earnings. We look to the announcement of strategic deal signing as the next catalyst excluding any acquisition activity. We maintain our BUY rating
The demand environment for BPO remains healthy. There hasn’t been a slowdown in deal flow especially at the smaller engagement level or elongation of sales cycles at the new or existing account level. The transformation business (14% of revenue) appears to be back on track after a slow start to the year in the first quarter (-7% y/y), which should be a tailwind to margins. The healthcare practice (5% to 10% of revenue) out of the Philippines remains a small but fast growing part of the business. There has not been an announcement of a strategic deal signing (3 in the pipeline), although conversations are progressing. A strategic deal signing announcement would be the next catalyst for the stock in our opinion. An announcement would be expected before the end of the third quarter, at the very latest, in order to have a positive impact on 2013.
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Joseph D. Foresi