Is This IT Company's Recent Pullback a Buying Opportunity?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Accenture (NYSE: ACN) recently reported disappointing results thanks to the drop in its consultancy revenue, which offset a healthy increase in its outsourcing business. Its clients are demanding longer horizon consultancy work, so revenue realization is slow in the company's consultancy business. On the other hand, the company’s outsourcing revenue increased due to the higher demand of outsourcing services. The company is also benefiting from the investment it had made in cloud computing, analytics and mobile platforms. In addition to these factors, the U.S. immigration bill, if passed, will give a competitive advantage to Accenture over its Indian IT peers. Below, I will discuss these points in detail.

The change in regulations in BFSI will boost revenue

The change in the regulatory needs for banks and capital markets is expected to increase the technology spending by banks and other companies. As a result, there has been an increase in the demand of outsourcing services. Outsourcing services have high margins when compared to onshore services. This will help the company improve upon its revenue and margin because of the higher demand.

Cloud platform, analytics and mobile technology will help Accenture increase its revenue

According to the IDC, the market size of cloud computing will be around $98 billion by 2016. Accenture has invested around $400 million in the cloud platform. According to the company’s management of its cloud computing division, this investment has started giving returns. The revenue from the cloud computing platform was about $1 billion in fiscal year 2012. Going forward, we will see a rise in the revenue from this platform.

Analytics and mobile technology is another platform that is expected to surge in the coming year. With increased spending in this segment across the globe, we expect that Accenture’s revenue will grow in the coming year.

U.S. immigration bill will help Accenture over its Indian peers

The U.S. immigration bill will help the company, which has its major workforce in the US only. Accenture will benefit from this bill as it has around 1370 H1-B workers among its 30,000 employees in the U.S. If the bill passes, it can increase the number of its H1-B visa holders without having to dole out extra to pay for H1-B visas. This will give Accenture a competitive edge over the Indian IT players.

Increasing demand for large transformational projects will have an impact on short term revenue

There has been a change in the nature of the consultancy projects. The clients are now demanding larger transformational projects with longer durations. This has impacted the revenue stream in the short run. The company is expected to have a positive impact from this going forward. The short term consulting projects have remained flat and are expected to remain so in the coming quarters, so revenue from this will be stable.

Peer analysis

Infosys (NYSE: INFY) has undergone a leadership change recently. It’s most charismatic and influential leader Narayan Murthy is back at Infosys as executive chairman. This has been necessitated due to Infosys’s falling fortunes in the last two years. Narayan Murthy has come at a time when the company has fallen behind its peers. The Company will look up to Narayan Murthy’s experience and leadership skills to sail the company out of this turbulent phase.

The company’s Infosys 3.0 strategy failed to improve its fortunes, and we believe that the company will go back to its core business of ADM. We believe that the return of Narayan Murthy will help Infosys gain its lost ground. So we are bullish on Infosys.

Cognizant (NASDAQ: CTSH) has been able to achieve a better growth rate when compared to its peers. The company’s strategy of low margin and high volume has certainly helped increase its revenue in the last two years. The company is also pursuing its strategy of diversifying its revenue streams through global expansion and investments in new platforms. It has invested in developing the SMAC stack (Social, Mobile, Analytics and Cloud).

With strong guidance for fiscal year 2013, the company is on track to beat its peers this year. The US immigration bill is expected to hit Cognizant less than its peers. This is because most of its employee are in the U.S. compared to its peers, which have dominantly an offshore workforce.

<table> <thead> <tr><th> <p><strong>Company </strong></p> </th><th> <p><strong>P/S ratio</strong></p> </th><th> <p><strong>Op. Margin</strong></p> </th><th> <p><strong>1 yr. Fwd. P/E</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Accenture</strong></p> </td> <td> <p>1.66</p> </td> <td> <p>14.12%</p> </td> <td> <p>16.29</p> </td> </tr> <tr> <td> <p><strong>Infosys</strong></p> </td> <td> <p>3.13</p> </td> <td> <p>25.97%</p> </td> <td> <p>13.49</p> </td> </tr> <tr> <td> <p><strong>Cognizant</strong></p> </td> <td> <p>2.55</p> </td> <td> <p>18.41%</p> </td> <td> <p>14.00</p> </td> </tr> </tbody> </table>

Accenture’s price to sales ratio is low when compared to its peers. This indicates that its stock is undervalued. The company is trading at a relatively higher PE than its peers, but I believe it deserves this premium given the high end nature of its services and good growth prospects. Its operating margin is lower than its Indian peers. However, its operating margins will not be negatively impacted by the proposed immigration bill, a headwind which its Indian peers will face.


Accenture's stock price has seen a correction after its last quarter results. I believe this correction provides a good opportunity to go long on the stock. The demand for offshore services in banking and capital markets is increasing, which will help Accenture improve its operating margin. The advent in cloud computing technology and analytics technology will have a positive impact on the growth of the company. The company is also going to benefit from the U.S. immigration bill. So I am bullish on Accenture.

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Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Accenture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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