Capgemini SA (CAPP.PA) Buy: Offshore Dynamics Encouraging, Citi Research

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Capgemini SA (CAPP.PA)
Buy: Offshore Dynamics Encouraging, Healthy Bookings Trends
 Overall solid business dynamics, strength in SAP integration — Capgemini
local management reported to not having seen meaningful negative effects on IT
budget and spending dynamics with the exception of the public sector. Bookings
in January have been encouraging. With ~40% of TS revenues being related to
packaged apps integration (a 10k SAP and a 10k SAP practise), it was
encouraging to hear the company’s comments with regard to very healthy
demand in this area, often related to large scale global SAP consolidations.
 Encouraging comments on offshore pyramid & offshore salary
management, 50% offshore in three years — Following on the company’s
strategy to focus on running operations in Indian tier2/tier-3 cities, Cap talked
about a hub (2-3k)-spoke model to further control cost. Local management
seems to target hiring ~6k staff in India in the current year, only ~15% less than
last year. We find this number encouraging, expecting another year of a
meaningful reduction in the reduction of overall average remuneration cost.
Strong offshore recruiting this year should also support Cap’s ambition to arrive
at 50% offshore penetration in three years. While Indian players recruit ~50-60%
of staff as fresh graduates, Cap’s comparable number is 35%-40% (both campus
and non-campus), but should gradually move upwards in the coming years. We
understand that ~40% of the recruits are from non-engineering backgrounds with
the remainder of them are off-campus and trained /certified at NIIT. Offshore staff
turnover seems to be ~15%, with IT at around18% and BPO in the 20% range.
 Interesting shift towards more offshore outsourcing in Europe — Labor
shortage and need for more scale in its operations to achieve savings seems to
be behind a meaningful shift, in particular to do more offshore outsourcing,
particularly in Scandinavia. Here TDC signed with TCS and Statoil with HCL,
CTSH has Volvo and the Norwegian Post as clients, Accenture signed Nokia,
while Cap signed a meaningful contract with Ikea. Capgemini’s ranking of
European countries in terms of recent Interest in outsourcing is Nordics,
Germany, Benelux and France. First-time outsourcers favor a multi-national
company in addition to track record. However when outsourcing involves staff
transfer (re-badging), workers councils tend to favor European companies.
Clients are overall getting smarter around outsourcing contract structurings (e.g.
annual productivity improvements) – but there does not seem to be pressure to
reduce prices. Recently in Europe the company has seen individual company’s
undercutting outsourcing prices in a slightly unhealthy way.
 Visas are not an issue — Visa problems don’t seem to be a problem for
Capgemini as they do not look for H1B – there is some knowledge transfer using
L1 visas. There were ~400 visas across 36k people.