Accenture Should Roll-Up Indian Services Companies

Is Accenture (ACN) still in the body-shop business model? Yep. Why ruin a good thing when it’s working, some would ask. And India continues to be a strong leverage point for Accenture’s outsourcing activities, with a new consulting center opened in the last quarter. This was also reflected in the 40% increase in staff being strongest in India and the Philippines (41% increase YoY Q1).

The more general question was, given the financial crisis, real estate crisis, oil crisis and any other calamity, how was Accenture going to handle the expectations of a rougher market in the weeks following early November 2007. At the time, CEO Bill Green believed that Accenture was strategically positioned to meet customers’ needs on a long-term basis to handle the economic turmoil of the market. And he has been right so far. Revenue growth for Q1 was the strongest in Asia (29%), with European markets coming in second (25%) and the Americas last (11%) by percentage.

Accenture’s guidance for 2008 Q1 was originally $5.46 billion. Q1 posted revenues came in mid-December reflecting an increase of 19% to $5.67 billion and beating expectations. This performance was split $3.5 billion from consulting and $2.2 billion from outsourcing. YoY gross margins were flat at 30.1% for Q1, and SG&A expenses, while at $970 million, were slightly less by percentage of revenue, showing improved cost management. And net income posted at $506 million, 25% higher than the previous year, same quarter. Accenture reaffirmed its full year revenue growth outlook of 9% to 12% versus what analysts believed would come in at 11.2% growth. However, cash was $120 million to the negative due to increased spending in operating activities ($31 million) and property/equipment purchases ($89 million).

Q2 revenue guidance has been adjusted to now project between $5.5-5.7 billion, again higher than analysts’ estimates of $5.3 billion.

The practice of customer satisfaction through long-term client relationships has so far paid dividends. Much of the earlier market fear was based on Accenture’s business consisting 22% in financial services.

Overall cash balance after adjustment totaled $2.47 billion versus $3.3 billion at the end of August. Given Accenture’s strength, and still a hefty cash balance in the bank, is it then conceivable that they could desire to increase their leverage in India? There are numerous Indian services companies that would entertain the idea of being acquired by Accenture.

Of course, the other option is for Infosys and Accenture to merge, which I am sure is crossing some minds.