India's IT Loss Is Accenture's Gain

| About: Accenture plc (ACN)

For years companies outsourced their back offices to India to save costs and eliminate employee headcounts. Now companies are realizing that the only benefit is the low costs and there are no value-added services. As the Indian IT companies lose market share, look for Accenture (NYSE: ACN) to continue to gain market share.

Accenture offers management consulting, technology and business process outsourcing services worldwide. In other words, the company is the ultimate solution architect. If you have a problem, chances are Accenture offers a solution. That's what the Indian companies are missing. They can code a program for a problem when given the solution, but they can't develop the solution whereas Accenture can.

Strength Lies In Accenture's Employees

Accenture has 259,000 employees that bring in an average of over $116,000 in revenue compared to Infosys (NASDAQ: INFY) that delivers only $48,000 per employee and has only 155,000 employees. Currently only 70 percent of Infosys staff are deployed on billable projects whereas Accenture has all of its staff deployed on projects.

Indian companies rely on Indian universities to recruit cost-effective talent. Accenture on the other hand is recruiting the smartest and brightest from Wharton, Harvard and other Ivy League schools.

Attractive Valuation

Accenture looks attractive from a valuation standpoint. The company is trading at 17.88 times earnings and has $5.64 billion in cash with no debt. The current annual dividend is $1.62 for a yield of 2.1% and a payout ratio of 38 percent. In terms of management effectiveness, the return on equity is an impressive 61.32 percent.

Diamond Clients

For Accenture, a diamond client is one that spends more than $100 million annually with the company. For fiscal year 2012, the company ended the year with 125 diamond clients, up from 100 in 2010. The closest Indian competitor, Tata Consultancy, has just 16 of these clients.

Steady Performance

The stock has just been a steady winner. Accenture has climbed from a 52-week low of $54.94 to a high of $78.46. The stock is up 18.98% in one year. Furthermore, in the past seven years, Accenture has returned $15.3 billion to shareholders in the form of repurchases and dividends. Look for that to continue as management has a history of avoiding capital-intensive projects and opting to return cash to shareholders.

Growth In The Cloud

Accenture realized in 2007 that future software growth was in cloud computing. The company has successfully partnered with Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), SAP (NYSE:SAP), Workday (NYSE:WDAY) and NetSuite (NYSE:N) to harness an effective cloud computing strategy for clients. Clients are able to have all their software services handled by one company and that's why they choose Accenture.

Second-Quarter Results

Second-quarter results for the company came in strong. Revenues increased 4% in both U.S. dollar terms and local currency to $7.1 billion. New bookings came in at $9.1 billion, which comprised record consulting bookings of $4.4 billion and outsourcing bookings of $4.7 billion. Operating margins came in at 13.3%, an increase of 20 basis points. Net income for the quarter was $1.19 billion, compared to $714 million in the second quarter last year. On a breakdown per region, revenues for the Americas came in at $3.28 billion, Europe, Middle East and Africa at $2.80 billion, and Asia-Pacific at $978 million.

Focus For The Company Is Growing Revenues In Asia-Pacific Region

According to Accenture, less than a third of large Asian companies are able to meet their revenue and profit expectations for their international businesses. The report commissioned by Accenture stated that 61 percent lacked an understanding of overseas customers and markets. Thirty-five percent cited their company's weak brand or reputation as their biggest problem.

Accenture has identified key points that Asian companies must focus on:

Being clear about their purpose for expansion to prevent conflicting strategies; then ensuring resources and capabilities are aligned to those corporate objectives.

Differentiating offerings in overseas markets based on deep understanding of customers and localized marketing and product development activities. Both social media and data analysis tools play an important role for success.

Building efficient and flexible operations with a focus on scalability and the ability to react to dynamic and volatile environments.

Putting in place the talent, leadership and cultures for global growth, which may involve role rotations, offshore placements, cross-cultural training and enhanced internal communications.

Accenture is positioning itself in the Asia-Pacific region to help Asian companies grow in international markets. Accenture has moved many of its key executives to the region to grow its consulting business. Accenture realizes that its future diamond customers are found in the Asia-Pacific region.

Positioned For Long-Term Corporate Growth

Besides IBM (NYSE:IBM), no other company in the IT space offers the range and depth of product services. Accenture has the strongest relationships with its customers in the IT services business. These days companies rely on a company like Accenture that can deliver. Accenture's reputation lies in fulfilling all the client's needs. It's this basis that hurts the Indian IT services companies the most and why Accenture is poised to gain more market share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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