Description

WNS is another boring but steady compounder -- one of my favorite kinds of businesses. 

The company is a large business process outsourcer (BPO), primarily based in India but serving companies in Europe and North America.

Let me first say that I initially ran into this company many years ago when doing research on robotic process automation (RPA) firms UiPath and Automation Anywhere. This is when UiPath had maybe a $3b valuation. In fact, I visited UiPath's R&D facility in Romania that summer. Going down that path, I expected RPA firms to claim that they are disrupting "traditional" BPO companies like WNS. However, to my surprise, forward looking BPOs like WNS are among the earlier adopters of RPA and in fact are important channel partners. Intrigued, I visited WNS's HQ in India a few months later and met with their top management. I've followed the company and owned the stock since then. Over the years, I've been impressed at the execution quality of WNS. They are a very understated, down to earth, underpromise but overdeliver team. The core team has been together for many years. They treat shareholders well and are very transparent. In short, I trust these guys.

With that intro out of the way, here's what I know about the BPO industry.

BPOs are not super glamorous. They do "routine" operations for clients. It could be customer service, HR, payroll, or whatever. However, BPO companies also have the following advantages:

1. They tend to be deeply embedded in customer workflows / business processes. There is a fairly high trust factor, because many of these processes are fairly mission critical. For example, WNS is allowed to "comp" angry customers at British Airways. You don't just give these powers to anybody. Switching costs are generally fairly high, and in fact switching costs grow as the BPO deepens its relationship. Therefore, WNS has retention rates in the 90s. They very rarely lose large client relationships.

2. BPOs require deep domain expertise. They must know the customer's needs very well. In fact, the best BPOs will suggest ways the clients can improve internal processes. WNS is organized on vertical lines, with larger examples being travel and insurance. Typically, a relationship ends up being "land and expand". The BPO can take over more and more functions if the initial contract succeeds.

Compared to most rivals, WNS is singlemindedly vertically oriented. Often in other BPO organizations, you find a matrix approach (e.g. parallel organizations focusing on verticals "retail" and horizontals "finance"), or pure horizontal (e.g. "finance" "logistics" "customer service"). There are cost trade offs for a pure vertical approach, but WNS has made it work and is able to offer better customer satisfaction as well as cross sell better, simply because they are closer to the end customer. This advantage cannot be understated.

3. Even more so than tech outsourcers, the work is nondiscretionary and non-project based.

4. As the BPO relationship deepens, the client's own capabilities in that area actually atrophies. They become more and more dependent on the BPO, creating a symbiotic relationship.

5. There is a growing trend towards "paying for results" vs "paying for heads". For example, paying $1 per insurance claim processed (or whatever). This actually encourages the BPO to adopt tech solutions / improve processes even further. Although detrimental to revenues, a successful engagement results in higher margins and actually allows the BPO to win even more wallet share. Trust deepens as well. This has been a gradual positive driver for WNS.

6. There is a perrenial worry about parts of their business being lost to automation. This is totally true, but good BPOs can find other pockets of growth. The nature of business is that as some pockets are simplified, new complexities and needs arise. Of course, this is 100% execution. They need to be very close to customers and industries to figure this out. They also need to do a great job cross training and retraining employees, which I think they do very well.

The BPO industry is quite fragmented. For example, all of the big India tech outsourcers have BPO arms. However, it's not a winner take all market and there is a nice tailwind.

I've followed WNS for quite a few years, and compared to others, I think they are very good at execution and they have very deep domain expertise in a few spots, notably Travel, P&C Insurance, Utility. Accordingly, WNS's organic revenue growth has been in the low teens (excepting 2020). This is in the very top tier of the industry.

You might have noticed that WNS stock cratered last year and only returned to its prior peak recently. Today, they trade for about 24x NTM, which is above historical averages.

Last year was almost a perfect storm.

Their biggest verticals are travel and insurance. Specifically, British Airways, Expedia, and UK Auto insurance. As you might imagine, all three took a ginormous hit. (Nobody was getting in car accidents as no one was driving).

On top of that, COVID shut down their offices and they had a hard transition to working from home. Typically, because of data security, clients are not comfortable with work from home.

Luckily, they have adjusted very well. Revenues were quite weak, but margins held up. They also announced some nice customer wins. Customers got comfortable with WFM. In the long term, I suspect working from home flexibility will permanently take down the cost structure a notch and actually make it easier to retain workers.

In 2021 and 2022, I really expect accelerating rev growth as multiple verticals "return to normal" and they continue to win new business. Consensus earnings look very very conservative.

Bottom line is that you are paying 24x NTM for somewhat depressed earnings, for a company with a very loyal client base that can grow low teens organic with some margin expansion longer term. Like I said, I trust the team here. I don't see many risk/rewards better than this in this market.

Catalyst

none. keep executing.