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Accenture:: Well positioned
Accenture has strengthened its business in the past five years, cutting
delivery costs and reducing exposure to the US market and financial
services. Meanwhile, the firm continues to build on its leading position in
consulting and systems integration. At 16.2xAug’11 earnings, we find
Accenture compellingly priced, especially amid a strong demand
environment for IT Services. We see five key drivers of a positive
investment thesis in Accenture over the next 2 years.
Stabilisation in the ratio of manpower across high and low cost locations
should aid Accenture’s revenue growth metrics as the deflationary impact
of manpower shift to low cost locations will go away.
Muted consensus revenue growth expectations (Street expects Accenture
to add lower net revenues than TCS in FY12/13) should see Accenture
surprise positively on revenues ahead.
Stability in manpower mix across delivery locations should drive significant
margin upsides from current levels.
Accenture’s willingness to invest in platforms/solutions should increase its
competitiveness as the game in IT Services shifts away from labour costs.
With the overhang from forced redemption of partner shares behind us,
we expect Accenture to gradually step-up its dividend pay-out.
#1: Transition to low cost locations nearing its end
~60% employees already in low cost delivery locations
Initially tentative, Accenture’s offshore transformation has gained pace and
become more proactive. The firm employs over 55,000 in India and 120,000
of its 211,000-strong workforce are located in low-cost regions. A key factor
in Accenture’s favour is that its global delivery network is nearing the optimal
manpower proportion. Through the last 5-6 years Accenture has suffered
from the revenue deflationary impact of shifting work from high cost to low
cost locations. Note that Accenture’s headcount in high cost locations has
almost remained constant over the last 4 years even as low cost manpower
has more than doubled. With ~60% headcount already in low cost locations,
we believe that this manpower transition is reaching its final stages. We
expect the low cost manpower proportion to touch the ~70% mark over the
next 18 months. At 70%, Accenture’s low cost delivery headcount proportion
will be comparable to that of the Indian Tech companies. 70% will likely be a
key inflexion point for Accenture, post which the deflationary impact would go
down materially. This will aid revenue growth metrics. In our view, the street
is not factoring this in the estimates.
through the past 5-6 years of Accenture’s effort to
increase the low cost delivery manpower, real revenue growth has been
higher than the reported numbers. In a year of 5% shift of manpower to low
cost location, to report 10% growth, Accenture has had to increase revenues
actually by 15%. We see this deflation nearing its end in the next 18 months.
#2: Muted revenue expectations leave room for upsides
Accenture should surprise positively on revenues ahead.
A cursory look at street revenue estimates for Accenture for FY12/13
indicates that consensus now expects Accenture to add lower net revenues on
an absolute basis than TCS (a company one third Accenture’s size on
revenues) in FY12 and FY13. In fact, consensus estimates factor net revenue
addition of just US$1.86bn and US$1.6bn for FY12 and FY13 respectively.
This is less than half of what Accenture added in FY08 (a good year for
demand) and 25-30% lower than net revenue addition in FY11. In our view,
the street is clearly under-estimating Accenture’s revenue addition capability.
Moreover, stabilisation in the ratio of manpower across high and low cost
locations should further aid Accenture’s revenue growth as the deflationary
impact of manpower shift to low cost locations will go away.
#3: Stability in manpower mix should drive margin upsides
One-off costs associated with manpower transition should go down
A gradual shift of employees to low cost locations has already aided
Accenture’s margin performance through the last few years. However, the
continued organisational disruption caused by this employee shift has meant
that full benefits have not percolated at the operating margin level. Note that
Accenture has had to incur significant costs (letting go 7% of the partner
workforce in August 2009) in facilitating this employee transition to low cost
locations. As the low cost manpower proportion stabilises around the 70-72%
mark, we expect disproportionate benefits at the margin level as these
transition costs get eliminated. However, street estimates do not factor this
margin improvement and we expect positive surprises on this front. We
expect Accenture’s margins to continue the upward trajectory through the
next few years.
#4: Expect continued increase in dividend per share
Lack of overhang from partner share buy-back should aid dividends
Despite generating over US$2bn of free cash flow annually over the last 4-5
years, Accenture’s dividend pay-out has been modest. That is attributable to
the accelerated redemption of partner shares which Accenture commenced in
2008-09. Since then, Accenture has bought out over 70m minority shares
from its partners. In the last 3 years, Accenture has spent over US$4.4bn in
redeeming partner shares. With the overhang from sudden release of partner
shares behind us, we expect Accenture to gradually step-up its dividend payout.
Over the last 4 years, Accenture has gradually increased its dividend per
share and we expect that trend to continue.
#5: Is Accenture worth less than Infosys/TCS?
Shift of focus away from labour costs should aid Accenture’s Mcap
A key point to ponder on the valuation front (and often repeated by us) is the
convergence of market capitalisation between Indian Tier-1 vendors and
Accenture. In 2002, Accenture’s market capitalisation was around five-times
that of Infosys, whereas now it is 10% lower than Infosys. Much of the
historical catch-up was justified given the massive apprehension around
Accenture’s ability in replicating the low cost advantage of Indian vendors.
Also, the growth gap (30-40%) for Indian vendors and Accenture (10-15%)
justified the big valuation differential. However, Accenture has been more
successful in replicating Indian vendors’ low cost offshore business model
than Indian vendors have been in replicating Accenture’s consulting-led
business model. Also, we see labour cost advantage as a story of the last
decade in IT Services. The way ahead will be shaped by ability of IT
companies to de-link revenue growth from employee addition.
#6: Investment in new areas will enhance competitiveness
Game in IT Services is gradually shifting away from labour costs
Accenture is showing greater willingness to embrace new technologies and
investments in emerging areas have led Indian IT peers. Importantly, with
most global IT players having credible low cost delivery, the game in IT
services is gradually shifting away from labour costs. In the race to de-link
revenue growth from employee addition, we see Accenture ahead of its peers.
This leadership in developing platforms and solutions should help Accenture
better exploit new IT opportunities. We have discussed these emerging
opportunities in greater detail in our report This is I.T.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Accenture:: Well positioned
Accenture has strengthened its business in the past five years, cutting
delivery costs and reducing exposure to the US market and financial
services. Meanwhile, the firm continues to build on its leading position in
consulting and systems integration. At 16.2xAug’11 earnings, we find
Accenture compellingly priced, especially amid a strong demand
environment for IT Services. We see five key drivers of a positive
investment thesis in Accenture over the next 2 years.
Stabilisation in the ratio of manpower across high and low cost locations
should aid Accenture’s revenue growth metrics as the deflationary impact
of manpower shift to low cost locations will go away.
Muted consensus revenue growth expectations (Street expects Accenture
to add lower net revenues than TCS in FY12/13) should see Accenture
surprise positively on revenues ahead.
Stability in manpower mix across delivery locations should drive significant
margin upsides from current levels.
Accenture’s willingness to invest in platforms/solutions should increase its
competitiveness as the game in IT Services shifts away from labour costs.
With the overhang from forced redemption of partner shares behind us,
we expect Accenture to gradually step-up its dividend pay-out.
#1: Transition to low cost locations nearing its end
~60% employees already in low cost delivery locations
Initially tentative, Accenture’s offshore transformation has gained pace and
become more proactive. The firm employs over 55,000 in India and 120,000
of its 211,000-strong workforce are located in low-cost regions. A key factor
in Accenture’s favour is that its global delivery network is nearing the optimal
manpower proportion. Through the last 5-6 years Accenture has suffered
from the revenue deflationary impact of shifting work from high cost to low
cost locations. Note that Accenture’s headcount in high cost locations has
almost remained constant over the last 4 years even as low cost manpower
has more than doubled. With ~60% headcount already in low cost locations,
we believe that this manpower transition is reaching its final stages. We
expect the low cost manpower proportion to touch the ~70% mark over the
next 18 months. At 70%, Accenture’s low cost delivery headcount proportion
will be comparable to that of the Indian Tech companies. 70% will likely be a
key inflexion point for Accenture, post which the deflationary impact would go
down materially. This will aid revenue growth metrics. In our view, the street
is not factoring this in the estimates.
through the past 5-6 years of Accenture’s effort to
increase the low cost delivery manpower, real revenue growth has been
higher than the reported numbers. In a year of 5% shift of manpower to low
cost location, to report 10% growth, Accenture has had to increase revenues
actually by 15%. We see this deflation nearing its end in the next 18 months.
#2: Muted revenue expectations leave room for upsides
Accenture should surprise positively on revenues ahead.
A cursory look at street revenue estimates for Accenture for FY12/13
indicates that consensus now expects Accenture to add lower net revenues on
an absolute basis than TCS (a company one third Accenture’s size on
revenues) in FY12 and FY13. In fact, consensus estimates factor net revenue
addition of just US$1.86bn and US$1.6bn for FY12 and FY13 respectively.
This is less than half of what Accenture added in FY08 (a good year for
demand) and 25-30% lower than net revenue addition in FY11. In our view,
the street is clearly under-estimating Accenture’s revenue addition capability.
Moreover, stabilisation in the ratio of manpower across high and low cost
locations should further aid Accenture’s revenue growth as the deflationary
impact of manpower shift to low cost locations will go away.
#3: Stability in manpower mix should drive margin upsides
One-off costs associated with manpower transition should go down
A gradual shift of employees to low cost locations has already aided
Accenture’s margin performance through the last few years. However, the
continued organisational disruption caused by this employee shift has meant
that full benefits have not percolated at the operating margin level. Note that
Accenture has had to incur significant costs (letting go 7% of the partner
workforce in August 2009) in facilitating this employee transition to low cost
locations. As the low cost manpower proportion stabilises around the 70-72%
mark, we expect disproportionate benefits at the margin level as these
transition costs get eliminated. However, street estimates do not factor this
margin improvement and we expect positive surprises on this front. We
expect Accenture’s margins to continue the upward trajectory through the
next few years.
#4: Expect continued increase in dividend per share
Lack of overhang from partner share buy-back should aid dividends
Despite generating over US$2bn of free cash flow annually over the last 4-5
years, Accenture’s dividend pay-out has been modest. That is attributable to
the accelerated redemption of partner shares which Accenture commenced in
2008-09. Since then, Accenture has bought out over 70m minority shares
from its partners. In the last 3 years, Accenture has spent over US$4.4bn in
redeeming partner shares. With the overhang from sudden release of partner
shares behind us, we expect Accenture to gradually step-up its dividend payout.
Over the last 4 years, Accenture has gradually increased its dividend per
share and we expect that trend to continue.
#5: Is Accenture worth less than Infosys/TCS?
Shift of focus away from labour costs should aid Accenture’s Mcap
A key point to ponder on the valuation front (and often repeated by us) is the
convergence of market capitalisation between Indian Tier-1 vendors and
Accenture. In 2002, Accenture’s market capitalisation was around five-times
that of Infosys, whereas now it is 10% lower than Infosys. Much of the
historical catch-up was justified given the massive apprehension around
Accenture’s ability in replicating the low cost advantage of Indian vendors.
Also, the growth gap (30-40%) for Indian vendors and Accenture (10-15%)
justified the big valuation differential. However, Accenture has been more
successful in replicating Indian vendors’ low cost offshore business model
than Indian vendors have been in replicating Accenture’s consulting-led
business model. Also, we see labour cost advantage as a story of the last
decade in IT Services. The way ahead will be shaped by ability of IT
companies to de-link revenue growth from employee addition.
#6: Investment in new areas will enhance competitiveness
Game in IT Services is gradually shifting away from labour costs
Accenture is showing greater willingness to embrace new technologies and
investments in emerging areas have led Indian IT peers. Importantly, with
most global IT players having credible low cost delivery, the game in IT
services is gradually shifting away from labour costs. In the race to de-link
revenue growth from employee addition, we see Accenture ahead of its peers.
This leadership in developing platforms and solutions should help Accenture
better exploit new IT opportunities. We have discussed these emerging
opportunities in greater detail in our report This is I.T.
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