Genpact’s Q2 2014 results show similar mid-single digit (5%) top line growth to Q1 (4.9%), in line with prior guidance for the year of 4%-6% (this has now been adjusted to 5-7% to include a revenue contribution from its Q2 acquisition of Pharmalink). But it is substantially below the 12.1% growth seen in 2013.  

EBIT margin was 13.0%, down both sequentially (-7 bps) and y/y (-157 bps). And adjusted operating margin (the metric Genpact prefers to comment on its performance as regards profitability) of 15.6% was also down both sequentially (- 76 bps) and y/y (-108 bps).

In Q2 the number of clients contributing $25m or more increased from 12 to 14, so there is some progress in making more money from its clients but we have yet to see the results from Genpact’s transformational plan announced in February this year (see our blog “Genpact: Slow Progress on Transformation Strategy in 2013 - Unveils Next Phase of Plan: http://research.nelson-hall.com/blog/?avpage-views=blog&type=post&post_id=139#sthash.u2IRYAcO.dpuf). This plan includes expanding/enriching the sales force (the intention is to invest at least 6% of revenues in sales and marketing) and increasing domain expertise with SME hires, and increasing industry specific capabilities through acquisitions.

With 37 new sales hires so far this year, client coverage has increased by 10%. The investment in client facing teams is presumably not just about generating new logos but also to improve the protection of existing business, with F&A BPO in particular being an increasingly competitive market (for example, Genpact recently lost most of the Honeywell renewal to Capgemini).

Expenditure on SG&A, at 25.4%, was at its highest for four years. Taking out S&M costs, G&A spend remains very high at over 19% of revenue – there was no mention of improving efficiency in G&A.

Management highlights three transformational deals this year, one of which an F&A win in the insurance sector. Revenue growth this quarter in the BFSI sectors which are key to Genpact (they account for 41% of total revenues) was the lowest it has been for years, at 3.8% y/y, though generally BFSI has been resilient this quarter. We note that no reason has been given by management for Genpact’s slow growth in BFSI this sector. Looking ahead, CEO N. V. Tyagarajan referred to ongoing discussions about setting up a potential BPO utility in the capital markets sector in H2, presumably through a client acquisition. Elsewhere, Genpact saw the strongest y/y revenue growth in its manufacturing sector business since 2012. at 14.5% y/y.

Genpact remains in the early stages of its transformational journey, with Tyagarajan again referring to 2014 as a "pivotal" year.

We have yet to see the benefits flowing through to the topline of a refreshed and expanded sales force, with early wins tending to be smaller project-based engagements. Management continues to guide on accelerated revenue growth in 2015 with margin improvements lagging slightly, presumably in 2016, once new large deals are past initial ramp-up stages.

So far in 2014 we have seen an IP enhancing acquisition and a vertical focused partnership. Expect to see more niche acquisitions such as Pharmalink, as Genpact continues its shift to promoting industry-specific BPO services with IP application and analytics.

Jessica Soler and Rachael Stormonth