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Infy Vs Accenture: Epic proportions! - Views on News from Equitymaster
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Infy Vs Accenture: Epic proportions!
Jun 28, 2005

Infosys is India’s second-largest software services exporter. The company has been a trendsetter in the Indian software sector. Be it in terms of consistency of performance, management vision, pioneering of the global delivery model or level of disclosures in terms of its operating metrics, the company has consistently set the trend for others to follow. Going forward, it is becoming increasingly necessary for Infosys to move rapidly up the value chain. The reasons are two-fold. Firstly, low-end, plain-vanilla application development and maintenance (ADM) services are increasingly getting commoditised, as these services do not require high level of skills, and secondly, competition at the higher end of the value chain is lower. However, it must be understood that operating in these services requires building up of competencies in such services.

By and large, these high-end services can be classified into IT/business consulting, systems integration, enterprise solutions and package implementation, infrastructure management services and products. Competition in these services may be lower, but undoubtedly, the quality of competition soars considerably. Globally renowned companies such as Accenture, BearingPoint, Computer Sciences Corporation (CSC), EDS and IBM immediately come to mind. The level of competition is several notches higher at these levels.

In this write-up, we attempt to do a comparison between Infosys, which has steadily been moving up the value chain over the years and Accenture (formerly Anderson Consulting), a global technology, consulting and outsourcing firm and see where the former stands on the global stage.

How do the two companies stack up?

Accenture has had an impressive record in terms of revenues, which have grown at a CAGR of 16% over the period 1989 to 2004. Given the fact that in 1989, the company’s revenues were at US$ 1.4 bn, this is an impressive performance by any standards on a high base. In fact, in 1989, Accenture’s size was more or less what Infosys’ size is today, at US$ 1.6 bn. It is definitely no mean achievement to achieve a double-digit CAGR on such a high base over a period of 16 years! It remains to be seen as to how Infosys will manage growth on an increasingly higher base.

Battle of the biggies!
(US$ m) FY02* FY03* FY04* CAGR (FY01-FY04)
Infosys Accenture Infosys Accenture Infosys Accenture Infosys Accenture
Net sales 545 11,574 754 11,818 1,063 13,673 36.9% 6.1%
Operating profit/(loss) 217 1,385 263 1,551 348 1,759 27.9% 36.2%
Operating margin 39.8% 12.0% 34.8% 13.1% 32.8% 12.9%    
Profit after tax 169 245 198 498 272 691 25.7% -13.2%
Net profit margin 31.0% 2.1% 26.2% 4.2% 25.6% 5.1%    
Revenues per employee 0.04 0.15 0.04 0.15 0.03 0.14    
* The fiscal year ends on March 31 for Infosys and on August 31 for Accenture.

Accenture classifies its revenues into five verticals – communications & high tech, financial services, government, products and resources. For the purpose of comparison, we have taken the last three years (FY01-FY04) as Accenture’s fiscal FY05 is yet to end. Infosys has registered a strong CAGR of 36.9% in dollar terms from FY01 to FY04. Accenture, on the other hand, has registered a rather more sedate 6.1% CAGR increase in revenues during this period. This was largely due, in part, to the global slowdown witnessed post the ‘dotcom bubble’. The financial services as well as telecom industry witnessed a slowdown. Even companies such as Sun Microsystems witnessed a slowdown during this period, as it depends to a large extent on these two verticals. Specialist companies, such as Temenos, catering to the global financial services industry, also saw revenue growth dwindling. Given that these two verticals contributed to as much as 51% of Accenture’s total revenues, the end-result was an adverse impact on revenues, which were flat in FY02, growing by a meager 1%.

Infosys, on the other hand, witnessed a strong 37% increase in revenues in FY02, given factors such as increasing trend of offshoring, acceptance of the strong advantages of its business model by its clients and consistent efforts relating to client mining and building up of long term relationships.

Even in FY03, as the global economy was in recovery mode, Accenture again witnessed a flat 2% increase in revenues. The same verticals led to the slowdown in growth. Infosys, on the other hand, again managed a strong 40% revenue growth. Quite clearly, the company was not affected by the global slowdown after the ‘dotcom bubble’ and has managed to maintain scorching rates of growth in the mid-30s.

However, in FY04, Accenture went back to the growth path, witnessing a strong double-digit revenue growth of 16%. In fact, in this year, all its five verticals witnessed double-digit growth rates. Over the period, the company’s government business has been the star performer, growing in double-digits every year at a CAGR of 26%. Infosys again continued on its merry way, witnessing a revenue growth of 33%.

Operating metrics comparison

In terms of operating margins, Infosys scores over Accenture by a fair distance. Over the years, as can be seen from the table above, Infosys has maintained relatively higher operating margins. Even though they have come down over the period under comparison, 33% margins at the operating level in FY04 is still very high. Accenture on the other hand, earned operating margins of around 13% in FY04. The big difference in margins is mainly due to the fact that Infosys’ cost structure is considerably lower, since it is India-based, where labour costs are anywhere between 30%-40% lower than in countries like the US.

It can be seen that Accenture’s operating profits grew at a stronger rate than Infosys. It must be noted that this was due to a low base in FY01, due to a considerable restricted share unit-based compensation awarded by the company to its employees. In FY02 and other years, there was no expense on account of this, resulting in a surge in operating profit of nearly 100% in FY02. To that extent, the picture is skewed.

As regards net margins, even though those for Infosys have come down during the period under comparison and those for Accenture have increased, Infosys still enjoys net margins over five time those of Accenture. It must be noted that net profit has reduced at a CAGR of 13% during FY01 to FY04, due to a massive 77% drop in net profit in FY02. This was mainly due to high profits of its subsidiaries, the minority interest for which was accounted for by the company in FY02.

In terms of revenue productivity, quite clearly, Accenture is well ahead of Infosys in this regard. Accenture is mainly a pure-play consulting firm, which provides high-end services to its clients. The company boasts of having 84 of the global 100 clients to its name and two-thirds of the global 500. As many as 73 of its top 100 clients have had a relationship of over ten years with the company. It employs over 110,000 employees in 110 offices in 48 countries around the world, around thrice those employed by Infosys. The revenues per employee for Accenture are nearly five times those enjoyed by Infosys. Going forward, as Infosys continues its movement up the value chain, we expect an improvement in this metric.

Conclusion

Infosys is quite clearly making its way into the big league of players operating in high-end services, such as consulting and package implementation. The revenue differential between Infosys and Accenture has gradually come down over the years and given strong growth and offshoring momentum expected by the company in the coming years, this could narrow down even further. While we do expect some amount of margin erosion for Infosys, going forward, we expect it to stabilise in the region of 25%. We are giving it a premium over Accenture because of its India-based model, due to which it is able to control costs effectively.

At the current market price of Rs 2,338, Infosys’ stock trades at a price to earnings multiple of 34.1 times FY05 earnings and 19.8 times our estimated FY07 earnings. Given the company’s visionary management, leadership position in the sector, strong offshoring growth expected, good cash position and increasing revenues from high-end services, we are positive on the company from a long-term perspective.

Accenture, on the other hand, at its current stock price of US$ 22.9, trades at a price to earnings of 18.8 times its FY04 earnings. Quite clearly, Infosys gets a substantial premium to Accenture. This, in our view, reflects the substantial growth opportunities available to Infosys as well as the premium commanded by the company due to the quality of its management, consistency shown in the past and perception among investors that the company will be able to move higher up the value chain and compete with the likes of Accenture and IBM, going forward. In fact, in terms of market capitalisation, on the basis of fully diluted equity capital, Infosys’ market capitalisation is at US $ 14.8 bn, while that of Accenture is around US$ 22.5 bn. This gap is expected to reduce over the coming years.

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