Dayanand Menashi

Which IT Outsourcing Stock is the Best?

Madhusudan,
I agree with your point that the core competance of offshoring gained by the Indian IT outsourcing heavy weigths cannot be mimmiced by the MNCs in few years. They would take years before they can achieve expertise in outsourcing field.

Coming back to your point on which stock is best for investment, it should be kept in mind that not all good companies are good stocks to invest. The golden rule of investing is to figure out "IS THE STOCK UNDERVALUED COMPARED TO ITS INTRINSIC VALUE".

In order to explain my point: Just consider the case of Microsoft. It is one of the best companies in the world. Their growth has been phenomenal in recent years (24% growth compounded annually).Following is their growth of net income last five years.

2002 $5.3bn
2003 $7.5bn
2004 $8.1bn
2005 $12.2bn
2006 $12.5bn

Now looking at the stock price, it was $30 in may-2002 and was around the same price in May-2007. The reason being the stock has been overvalued last few years and the market has been contantly correcting its value by reducing its P/E. Which during the dotcom bust was around 84 and has come down to around 20 now.

Following are the P/Es of some of the leading outsourcing companies.

Infy P/E = 28.5
Wipro P/E = 27.4
Cognizant P/E = 36.3

IBM P/E = 17.9
ACN P/E = 19.5
EDS P/E = 18.2

I guess your analysis should be more on evaluating the P/E of the above mentioned stocks and figuring out if they would remain the same in near future.

visit me @ annualreportanalysis.b...

The Truth Behind Accenture’s High Return on Equity

Ciba,
So what do u think about the retirement obligations, it is stated in Non Current liabilities section of the balance sheet. It has decreased from 753mn to 492 mn. But is still a big percentage compared to the book value of $1.89bn.

I tried to find an explanation in the footnote-10 as to how Accenture calculates its retirement obligations, but could not match the figure of $492mn. Let me know if you can figure out how they calculate the retirement obligations.

Thanks,
Dayanand.

Indian Outsourcing Stocks: Beware The Stronger Rupee

Thomas,
Being in IT consulting industry I can exactly understand your point. You know what is the biggest USP of ACN stock......it is that even though they are the world's biggest outsourcing company, outsourcing is less than 50% of its total revenue.Becausue its consulting revenues is more than that of outsourcing.

2006 figures
Consulting revenues - $9.89 bn
outsourcing revenues -$6.75bn

So for any investor that wants to invest in outsourcing business and also want to play safe....there is just one stock.....u know what I am talking about...

The Truth Behind Accenture’s High Return on Equity

After your reading your comment again....I thought of one point.....I guess the investor would also be interested to know as to how the money was returned.

For instance. If Accenture borrows $100mn and buys back its shares then actually its book value would be reduced by $200mn. Because it would also have an additional debt of $100mn.

So ROE of Accenture would increase by 10% because its book value now is $2bn - 200 mn. So just by changing its debt to equity ratio a company can increase its ROE.....

In fact this point can really be intersting if we consider the way Accenture's debt has changed over the years.

2002 10-K balance sheet
Current Liabilities : $3,327,062
Non current Liabilities :$1,193,864
----------------------...
TOTAL :$4,520,926
----------------------...

2006 10-k balance sheet
Current Liabilities : $5,816,482
Non current liabilities : $839,465
----------------------...
TOTAL : $6,655,947
----------------------...

Accenture's liabilities have almost increased by $2bn , on top of this they have bought back shares and returned money to investors.

The Truth Behind Accenture’s High Return on Equity

OK I might have been a little more aggressive about the 10% return on marketable securities....I guess 5% would be more realistic....

returning to our main discussion point of relationship between ROE and treasury shares. I tried hard to find a company that had an amount of $860 mn in treasury shares.

Do you know of any company that has this much amount in treasury shares?

Indian Outsourcing Stocks: Beware The Stronger Rupee

Hi Eric,
Good point on strengthening of rupee. I feel even Cognizant will be equally impacted with this because even it has most of their employees in India who are paid in Indian rupees.

And as well all know Cognizant's maximum revenue comes in Dollars. So as rupee strengthens their revenue remains the same but the costs increase, becuase they have to spend more dollars to convest to rupees to pay their employees.

Following is a simple example :

Let us say Cognizant has a project where they are expecting $1mn revenues each quarter. 40 people are working in India in this project.Avg pay for an employee in this project is Rs25,000 / month which is Rs 75,000 / quarter.

Therefore net pay for 40 people = Rs3mn / quarter.

If for first quarter 1USD = Rs 45.00 then the employee cost for that project for that quarter = $66,666 (Rs 3 mn / 45)

If in the second quarter 1USD = Rs40.00 then the employee cost for the project that quarter = $75,000

This is an increase in $8,344 which is a whopping 12% increase.

CONCLUSION : The impact of gain in rupee is not dependent as to where the company is headquarterd instead it depends on its headcount in India. In fact I dont see how Accenture wont be impacted because it is projecting to have around 50,000 people in India by the end of this year.

Thanks,
Dayanand
visit me @ annualreportanalysis.b...

The Truth Behind Accenture’s High Return on Equity

Sharebuybacks are neither irrelevant nor unusual. In fact they are very much relevant and we saw how it increased the ROE. My bottomline is as follows:

1. Let us say you are comparing Accenture with a company 'X'.

2. At the beginning of the year both have book value of $2bn. Accenture buys its own shares for $100 mn. And Company 'X' invests $100 mn in marketable securities.

3. Let us say by the end of the year the marketable securities and Accenture's stock appreciate by 10%.

So as far as an investor's point of view both have achieved the same result. But the ROE of Accenture is more than company 'X' because its book value has been reduced by 100 mn.

For calculating the ROE it is assumed that both have same net income.

The Truth Behind Accenture’s High Return on Equity

Thanks for your calculations.....
so if Accenture would not have bought back the shares then the new figures would be as follows:

Net income $973 mn + 25 mn = $998 mn
Income before minority interest = $1,430 mn + 25 mn = $1,455 mn
Book value = $1,890 mn + 725 mn = $2,615 mn (adding $725 mn cash to the book value).

Therefore the new ROEs are

ROE (calculated for net income) = ($998 mn / $2,615 mn) = 38.16%
ROE (calculated for net income before minority interest) = ($1,455 mn / $2,615 mn) = 55.64%

I guess these are quite close to the figures I calculated in my analysis i.e. 37% and 53%.

Do I still need to answer the question if Accenture's ROE would be lower if they didnt buy back stock.....the figures are in front of you .....38% and 55% (if they did not buy back shares) compared to the present figures of 51% and 75%.

But my bottomline was not to prove this point, it was just to make aware to the investors that if they are comparing Accenture's ROE with some other company's ROE then they should make sure they take a closer look at the structure of the book values of both the companies.

The Truth Behind Accenture’s High Return on Equity

1. Can you please make an estimate about interest income. This would add up to the numerator.

2. The cash that wouldnt have been used to buy back shares would add up to the book value increasing the denominator.

It would be interesting to see how the numerator and denominator now compare.

Why is Accenture's Market Cap Less Than Infosys'?

Hi Ciba,
Please dont get furious, I guess it is for people to decide if my posts are worth there time.Even if you would have written great praises about my analysis that would not mean anything to my readers.

Because I guess they are smart enough to figure out what makes sense, in fact they might find your remarks about Yahoo finance really amusing because most of my readers are directed from the financial blogs section of Yahoo Finance which I guess they find informative.

Thanks a lot for your time on writing about my blog.
Dan.

Why is Accenture's Market Cap Less Than Infosys'?

so if Accenture IR does not care then why are we arguing about???.....Well if I apply your freebie theory then seekingalpha is also FREE so you get what you pay for....HA HA HA

Why is Accenture's Market Cap Less Than Infosys'?

Ciba,
As you have mentioned about calling the Accenture IR twice. I was wondering if it would be a good idea for you to call them and inform them about their market cap in Yahoo Finance's website.

I am just curious that how come Accenture's IR is ignoring this issue, after all yahoo finance is one of the most popular websites and any dicrepency in its information would be taken seriously by the parties that are affected by it.

Thanks,
Dan

Why is Accenture's Market Cap Less Than Infosys'?

Ciba,
please dont get frustrated, first of all no sensible analysyt would call an investor relations dept for getting such a basic information , its is available in the 10-k report published in SEC .

You have already agreed that the Class-X shares donot carry any economic value, now please do me another favor. Please read the first page of the 10-k report available in the following link
www.sec.gov/Archives/e...

Following is the verbage where it is clearly stated that :

"The number of shares of the registrant’s Class A common shares, par value $0.0000225 per share, outstanding as of October 12, 2006 was 584,360,126 (which number does not include 35,306,040 issued shares held by subsidiaries of the registrant). The number of shares of the registrant’s Class X common shares, par value $0.0000225 per share, outstanding as of October 12, 2006 was 237,733,470."

I am pretty sure you would come up with the comment that "Class X shares have nothing to do with the number of shares outstanding".

I guess if you want to deny the facts then I cant help you.
Thanks,
Dan

Why is Accenture's Market Cap Less Than Infosys'?

Mentioning of facts, I guess you are not right about the economic value of shares. I had mentioned this in one of my earlier reply as well.

THE LAST LINE CLEARLY STATES THAT THE CLASS I SHARES DONOT HAVE ANY ECONOMIC VALUE
======================...

page 13 of the SEC 10-K report following is mentioned in the section ORGANIZATIONAL STRUCTURE

"Prior to our transition to a corporate structure in fiscal 2001, we operated as a series of related partnerships and corporations under the control of our partners. In connection with our transition to a corporate structure, our partners generally exchanged all of their interests in these partnerships and corporations for Accenture Ltd Class A common shares or, in the case of partners in certain countries, Accenture SCA Class I common shares or exchangeable shares issued by Accenture Canada Holdings Inc., an indirect subsidiary of Accenture SCA. Generally, partners who received Accenture SCA Class I common shares or Accenture Canada Holdings Inc. exchangeable shares also received a corresponding number of Accenture Ltd Class X common shares, which entitle their holders to vote at Accenture Ltd shareholder meetings but do not carry any economic rights."

Why is Accenture's Market Cap Less Than Infosys'?

Ciba,
I guess we are are diverting our attention to the initial discussion. : If we want to come to any conclusion we should decide on the following points.

1. What is the number of shares outstanding for Accenture.:
In my opinion it is 584 mn shares which have been stated in its 10-k report. But in your opinion you feel the number of shares outstanding is 850 mn because you are also counting the Class-X shares which actually are not traded and dont have any economic value. they just have voting right.

2. What should be the formula to calculate market cap.
In my opinion it should be the number of shares publicly traded x stock price.
In your opinion it should be all the shares for the company x stock price.