Debt major worry for ESO

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PUNE, INDIA: The latest research on the Engineering Services Outsourcing (ESO) sector titled Engineering Services Outsourcing: Revenue fall necessitates curb in expenses' tells that return on equity of pure-play ESO companies in India slid from 34 per cent in 2007 to - five per cent in 2011. With annual growth rates of 30 to 35 per cent between 2007 and 2009, revenue decreased by 21 per cent in 2010. Debt has als become a major concern for medium-sized companies, it highlighted.


Mahindra Engineering came out on top with strong financial credentials across parametersCompared to outsourcing IT and other business processes, engineering services outsourcing (ESO) on a global scale is a relatively recent trend. Keeping the potential of this segment in mind, ValueNotes analysed the key financial ratios of Indian pure-play service providers in ESO, in a report titled “Engineering Services Outsourcing: Revenue fall necessitates curb in expenses”. While traditionally the total export revenues in India from engineering research and design services include the captives in the market, this study only comprises the pure-play ESO firms. Financial indicators show that the segment was unaffected by the global economic crisis until 2009, but the slowdown in 2010 adversely impacted it, bringing the weaknesses in their financial performance to the forefront.

“In 2011, shareholder returns were wiped out and return on equity had slid to -5 per cent. This is a major cause for concern. In fact, weaknesses in financial performance always existed and had been building up, but high revenue growth had been masking them,” says Arjun Bhuwalka, project manager at ValueNotes. The Indian pure-play ESO segment has seen a fall in performance across several key financial indicators, and is now in a comparatively worse position than other pure-play KPO segments.

In 2007, ROE was high across all three segments (small, medium and large sized), with small-sized companies having the best ROE. But by 2011, only large-sized companies had a positive ROE. Medium-sized companies have been the worst hit. They have added to their burden by taking on more debt, leading to difficulties in meeting their interest obligations.