Infosys, TCS Overtake Accenture in Market Cap

Accenture’s (ACN) market capital is now less than Infosys (INFY) and Tata Consultancy Services. It has a current market capital of around $17bn. This works out to around Rs 76500 crore. Both Infy and TCS have market caps exceeding Rs 100,000 crore or around $22bn. That’s around 30% more than Accenture.

Buyback: Accenture management is clearly troubled by the fall in valuation. It has announced a buyback price per share that is not greater than $24.75 nor less than $22.50. The Board of Directors of Accenture authorized the use of $650 million of existing cash from operations to fund the offer, as well the use of up to an additional $123 million should Accenture SCA choose to increase the size of the offer in response to shareholder demand. This aggregates to about 5% of current market cap. The offer closes on October 6.

Erratic Performance: Accenture’s performance in recent quarters seems to be erratic. Profits were good in the quarter ended May’06, but in the previous quarter (ended Feb’06) there was a massive slump.

Accenture’s low MCap compared to Indian companies is partly due to lower P/E. This is a result of two things - ACN’s profitability is lower compared to Indian companies, also its growth rates are lower.

Lower profitability is again a result of multiple factors:

* Its margins are lower. Check the data. ACN’s operating margins are between 12-14%. Infy has the best margin in India IT, and a comparable figure for Infy would be around 30%.

* ACN’s profits and margins appear highly erratic. This is surprising -- ACN claims to also be a top flight consulting firm. Here is its explanation of the disastrous 2Q’06:

As previously reported, we have certain large, long-term contracts under which we have been engaged by the National Health Service in England to design, develop and deploy new patient administration, assessment and care systems for local healthcare providers and, subsequently, to provide ongoing operational services through 2013 once these systems have been deployed. During the second quarter of fiscal 2006, there were several developments that significantly increased the risks and uncertainties associated with these contracts and materially impacted our estimates of the contract revenues and costs we expect to record in connection with the NHS Contracts (as defined below). To reflect our revised estimates with respect to design, development and deployment, we recorded a $450 million loss provision in the second quarter of fiscal 2006. During the third quarter of fiscal 2006, there were no significant developments affecting the loss provision estimates.

I suspect in plain English this means ACN booked revenues it shouldn’t have somewhere earlier, and reversed this is quarter ending Feb’06. This looks like questionable accounting to me. This from a top-flight consulting firm?

* ACN pays taxes unlike most Indian companies. ACN’s tax rate has been between 30-35%. In contrast Infy’s tax rate is around 11%.

Then ACN’s growth rates are lower. It seems to be growing revenues at around 12-15%. This is less than half the growth rate of Indian IT. Even ACN’s outsourcing business, which is about 40% of so of its total business, seems to growing around 15% pa rate. Read from its SEC filing:

Outsourcing revenues before reimbursements for the three and nine months ended May 31, 2006 were $1.75 billion and $4.98 billion, respectively, compared with $1.58 billion and $4.44 billion, respectively, for the three and nine months ended May 31, 2005, increases of 11% and 12%, respectively, in U.S. dollars and 14% and 15%, respectively, in local currency.

Its pipeline though looks pretty good. Again read this:

New contract bookings for the nine months ended May 31, 2006 were $15,437 million, an increase of $2,568 million, or 20%, over the nine months ended May 31, 2005, with consulting bookings increasing by 10%, to $8,065 million, and outsourcing bookings increasing by 33%, to $7,372 million.

(SEC info from finance.yahoo.com)

Comments

[Jose Martin:]

Just goes to show that we have Indian Originating MNCS (IOMs) that can compete and beat so called International MNCs!!

2006 Sep 30 04:27 AM