Chennai: The Indian outsourcing sector has been severely afflicted by the rupee rise, with most of the companies showing a slump in growth and profitability. This situation not only reflects the 'deteriorated revenue growth expectation' of investors, but also makes the domestic BPO space ripe for heightened merger and acquisition activities, reported Business Line.

"M&A activities triggered by low interest rate regime in the U.S. might surprise the sector with valuation multiple reaching the early 2007 levels," claimed Manoj Bothra, Senior Associate with Ernst & Young.

Considering the circumstances, PE (private equity) players will be driving the M&A wheel in search of possible acquisition targets. In the past week, PE fund Nalanda India has picked up a 5.25 percent stake in the U.S. listed BPO firm WNS Holdings. But even the U.S. listed but the India based BPO companies could look at acquiring stakes in India-listed counterparts. Genpact is reportedly looking at adding more domestic clients in regions like Asia such as India and China.

Commenting on the companies who could be on the radar, Bothra gives examples of some India-listed BPO companies with out singling out any, "Allsec Technologies has been the worst hit, as the market capitalisation of the company fell by 70 per cent in March 2008 as compared to March 2007. Datamatics and HOV Services also saw their market capitalization reduced by 40 percent and 60 percent respectively," he said.

As far as the Indian companies are concerned, rupee appreciation has been too quick to react with appropriate measures that offset the currency fluctuation, while the U.S. listed counterparts have fared well on the margins front, even though their cost structure is almost the same as that of the Indian-listed entities.

Convergys, Syntel, WNS and EXLServices, the top four India-based BPO firms listed on Nasdaq have been able to maintain their EBITDA (earnings before interest, taxes, depreciation and amortization) margins to a greater extent due to prudent foreign exchange hedging policies, said Bothra.