Accenture Stock: IT Consultancy Leader To Strengthen Market Share (NYSE:ACN)

Accenture plc (ACN) is one of the leading professional services firms with global operations across 120 countries.

As the company has a strong M&A track record, we looked into its M&A activities to determine how it enhances its consulting capabilities to provide better service to clients. We did this by calculating the growth of Accenture relative to competitors based on the markets it serves through its consulting capabilities.

Moreover, we examined its brand reputation as one of the leading consultancy firms in relation to its competitors to determine how its brand reputation affects its revenue and market share. In relation to this, we also examined how its high brand reputation enables it to acquire long-standing and large customers and determine if this would lead to continued sustainable growth in the future.

Lastly, we examined its employee satisfaction and development initiatives and determined how it affects the level of service provided to clients to determine the premium paid by clients over the cost of employees. We measured this in relative terms of the company margins.

M&A Track Record Enhances its IT Consulting Capabilities

According to Tracxn, the company has 225 acquisitions which are the highest among competitors in the table below. Since 2019, we identified 71 acquisitions to be related to technology out of 104 acquisitions including Cintoo and Tailspin.

Company	Acquisitions
Accenture	225
Wipro (WIT)	23
Capgemini (OTCPK:CAPMF)	43
Tata Consultancy	5
Cognizant Technology (CTSH)	48

Source: Tracxn

Furthermore, the company has a strong cash flow with an average FCF margin of 10.51% in the past 10 years. We believe this supports its ability to pursue its M&A activities.

In relation, the company has been recognized as a leader by several research companies including IDC, Gartner (IT) and Everest Group including managed security services, incident readiness services and platform services for banking. We believe this indicates its strong capabilities enhanced by its acquisitions.

Furthermore, we also determined how its enhanced capabilities enable it to provide better service to clients. We did this by first breaking down its revenue by end markets based on its Annual Report. We further categorised its segments according to the GICS classification breakdown. Then, we compiled the forecasted market CAGR for each of the sectors and industries that the company has revenue exposure. We repeated this with its competitors including Cognizant, Capgemini, Wipro and Tata Consultancy based on their segment disclosures in their Annual Report. With the data collected, we plotted the chart below of the comparison between the company and its competitors. Moreover, based on the chart, we distinguish the data into 4 quadrants by balancing the number of data points in each quadrant to obtain a map of the company’s segments and growth rates. On the vertical axis, we obtained a midpoint at around a 5.5% CAGR, and on the horizontal axis, we obtained a midpoint closer to $1.8 bln in revenue. The chart indicates each company’s competitive positioning based on the size of its segments and the forecasted market growth rate.

Based on the chart above, we found that Accenture has the highest number of data points at 13 as we were able to break down its segments into more industries and indicates its superior business diversity catering to a wider market. Additionally, Accenture has the highest number of data points in the top with 7 out of 13 points which are nearly half of its points in the top right quadrant. However, its number of data points in the top left quadrant is 5 out of 13 which is close to the number in the top right quadrant. The majority of its data points are above the $1.8 bln revenue line. Thus, we believe this highlights its competitiveness having larger revenues in its segments than competitors.

In comparison, Cognizant has the highest number of data points in the bottom left quadrant (4) relative to its total number of data points (7) against competitors which indicates a slower growth outlook for the company. Meanwhile, the majority of Tata Consultancy data points are concentrated on the right side of the chart with 2 and 3 data points in the top right and bottom right quadrants which indicates its competitive threat against Accenture. In relation, although Wipro only has 1 data point in the top right quadrant, the majority of its data points are in the bottom right quadrant at 4 out of 8 which signifies its strong growth outlook despite its smaller scale.

Accenture Segment	Market CAGR	Adjusted Weight	Effective Weight	Weighted CAGR
Communication Services	1.34%	43.0%	8.8%	0.1%
Technology Hardware & Equipment	2.13%	5.0%	1.0%	0.0%
Semiconductors	10.00%	5.0%	1.0%	0.1%
Aerospace & Defense	5.20%	5.0%	1.0%	0.1%
Health Care Equipment & Supplies	6.30%	5.0%	1.0%	0.1%
Software & Services	7.12%	37%	7.5%	0.5%
Banks	6.00%	34.5%	6.8%	0.4%
Diversified Financials	5.77%	34.5%	6.8%	0.4%
Insurance	6.00%	31.0%	6.1%	0.4%
Health Care Providers & Services	8.40%	34.0%	6.4%	0.5%
Public Service	4.10%	66.0%	12.4%	0.5%
Consumer Staples	5.28%	25.5%	7.0%	0.4%
Consumer Discretionary	8.12%	25.5%	7.0%	0.6%
Industrials	5.60%	25.0%	6.9%	0.4%
Pharmaceuticals, Biotechnology & Life Sciences	7.70%	23.0%	6.4%	0.5%
Materials	4.00%	28%	3.8%	0.2%
Energy	2.47%	24%	3.3%	0.1%
Utilities	4.00%	47%	6.4%	0.3%
Accenture Forecast CAGR	–	–	–	5.4%

Source: Accenture, Statista, Market Research Reports, Khaveen Investments

Overall, we believe its consulting capabilities to be enhanced by its M&A activities as it ranks the top among market research firms including Gartner, IDC and Everest Group. Based on the chart we derived of the competitive positioning of the IT consultancy companies, we believe Accenture’s positioning indicates its superior size and business diversity.

Solid Branding and Reputation

Furthermore, a key feature of the company is its list of awards and recognitions. Based on the table below, we compiled the number of awards received based on each companies’ website as well as the ranking by Firsthand of the top IT strategy consulting firms based on a survey of consultants voting for the best firms.

Company	Awards	Ranking
Accenture	44	1
Tata Consultancy	5	17
Capgemini	25	9
Cognizant Technology	40	13
Wipro	4	–

Source: Accenture, Tata Consultancy, Capgemini, Cognizant, Wipro, Firsthand

As seen in the table above, we find that Accenture has the highest number of awards compared to competitors as well as it being ranked as number 1 by the Firsthand IT consultancy survey. Thus, we believe this highlights the company’s strong branding and reputation in the industry.

Accenture Diamond Clients	2012	2014	2019	2020	2021	7-year CAGR
Diamond Clients	125	140	200	216	229	7.3%

Source: Accenture

Meanwhile, the company’s number of diamond clients (above $100 mln in revenue) had grown to a 7-year CAGR of 7.3%. At the same time, its revenue growth had a CAGR of 7.7%, and its market share increased from 3.3% to 4.3%.

Growth %	10-year Average	5-year Average	5-year Forward Average	Market Share
Accenture	6.9%	9.1%	8.0%	4.3%
Tata Consultancy	10.5%	6.2%	5.4%	1.9%
Capgemini	5.1%	9.6%	5.2%	1.7%
Cognizant Technology	11.0%	6.6%	6.0%	1.6%
Wipro	3.5%	1.9%	5.7%	0.7%
Average	3.1%	5.8%	5.1%	–

Source: Company Data, Statista, Khaveen Investments

Additionally, the company’s market share has been increasing in the past 10 years. Both its 5-year and 10-year average growth outpaced the market’s average growth rates. Not to mention, its market share is the highest among the competitors in the table above. Its 5-year average growth is the second highest compared to Capgemini which acquired Altran in 2019.

Company Revenue ($ bln)	2019	2020	2021	2022F	2023F	2024F	2025F	2026F
Accenture	43.2	44.3	50.5	59.86	63.10	66.51	70.11	73.90
Growth %	5.4%	2.6%	14.0%	18.5%	5.4%	5.4%	5.4%	5.4%

Source: Accenture, Khaveen Investments

To project its market share, we forecasted its revenue in 2022 based on its annualised Q1 2022 results of 18.5% in line with the company’s full year guidance of between 19% to 22% and analyst revenue consensus of 18.6%. Beyond 2022, this is followed by our revenue projections based on a derived weighted CAGR of 5.4% from its revenue market segment breakdown and market forecast CAGR as discussed in the previous point through 2026. For its competitors, we projected the weighted CAGR of each company based on the revenue breakdown of its customer segments. Whereas for the total market growth CAGR, we obtained the market forecast for IT Consulting, Business Process Management and IT Outsourcing to derive a weighted CAGR of 5.11% as our forecast growth rate for the total IT Services market. From the chart, we see Accenture not only maintaining but also solidifying its market leadership by gaining market share with growth expected to outperform the market growth rate. Besides Accenture, we see its competitors Cognizant, Wipro, Tata Consultancy and Capgemini also outperforming the market, with Cognizant being the second top performer overall.

IT Services	Market Size ($ bln)	Weight	CAGR
IT Consulting Services	833.4	60.2%	4.40%
IT Outsourcing	318.5	23.0%	4.50%
Business Process Outsourcing	232.32	16.8%	8.50%
Total	1384.22	100%	5.1%

Source: DataIntelo, ReportLinker, GrandViewResearch, Khaveen Investments

Thus, we believe the company’s strong brand reputation enables it to solidify its market positioning and grow its revenues as indicated by its growing customer relationships with its diamond clients, and we expect this to lead to sustainable growth for the company going forward and support its market leadership.

Strong Employee Development and Satisfaction

Moreover, the company focuses on employee development initiatives. Recently, the company announced that it has opened a Talent Hub to train people in Salesforce technology. Additionally, it also expanded its apprenticeship program in the US.

We examined and compared its employee and customer satisfaction based on the reviews by Indeed.com and Trusted Reviews with competitors to determine the level of service provided to clients to determine if it commands a higher level of service than competitors and a premium paid clients for its services.

Review and Margins	Customer Reviews	Employee Review	Average	Gross Margins (5-yr)	Gross Margins (10-yr)	Attrition Rates
Accenture	4.6	4	4.30	31.16%	31.60%	14%
Wipro	4.7	3.8	4.25	29.56%	30.10%	11.9%
Capgemini	4.7	3.8	4.25	24.06%	24.56%	15.2%
Tata Consultancy	4.6	3.9	4.25	25.32%	26.43%	33.0%
Cognizant Technology	4.7	3.9	4.30	37.52%	38.99%	20.5%
Average	4.66	3.88	4.27	29.52%	30.34%	18.92%

Source: Accenture, Indeed, FeaturedCustomers, TechGig, Khaveen Investments

Based on the table above, the company has slightly lower than average customer reviews out of 5 stars. However, the company comes out on top in terms of employee reviews at the highest among competitors. We calculated the average of its customer and employee reviews and found it to be tied with Cognizant as the highest among competitors. In relation, both Accenture and Cognizant have the highest gross margins. Also, the company has one of the lowest attrition rates besides Wipro. Thus, we believe this supports a higher margin upside for the company indicated by the superior customer and employee review average against competitors.

Furthermore, based on the company’s expense analysis chart, its COGS which is its largest expense represented 66% of revenue in 2021. From 2018, the company’s COGS as a % of revenue had declined steadily to 2021.

Lastly, the company has long-standing client relationships as 98 of its top 100 clients have been with the company for more than 10 years. According to Chris Schrader, a former analyst and consultant at Accenture, consulting firm partners commonly leverage their network to secure clients and clients tend to continue to do business with satisfied consulting firms.

Clients who are typically pleased with the services of a consulting firm will generally continue to buy from that firm for future project needs. – Chris Schrader, former analyst and consultant at Accenture

Earnings & Margins	2019	2020	2021	2022F	2023F	2024F	2025F	2026F
Gross Margin (%)	30.81%	31.53%	32.38%	32.51%	33.47%	35.63%	37.77%	39.90%
EBIT Margin	14.59%	14.69%	15.08%	15.36%	16.38%	18.53%	20.67%	22.80%
Net Margin (%)	11.06%	11.52%	11.69%	11.64%	12.30%	13.94%	15.57%	17.19%
Free Cash Flow Margin	11.30%	14.28%	9.22%	-0.44%	13.06%	13.84%	15.32%	16.81%

Source: Accenture, Khaveen Investments

As the company focuses on employee development initiatives, we believe the average of its customer and employee reviews which is highest among competitors indicates a high level of service provided to customers. We believe that this could provide the company with the ability to command a higher premium paid by clients as measured by its gross margins and we projected it to increase gradually to 39% based on Cognizant’s 10-year average margin as both companies have the highest average customer and employee reviews.

Risks: Decreasing Cash to Debt Ratio

While the company has a strong M&A activity track record and high free cash flows, its financial position in the past 10 years has deteriorated slightly. Its debt has increased over the past 10 years by 87% while its cash to debt ratio decreased to 0.39x in 2021.

Net Debt (Net Cash) ($ mln)	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
Debt	11,137	10,477	10,581	10,404	11,139	11,455	12,376	13,316	18,230	20,805
Cash & Cash Equivalents	6,643	5,634	4,924	4,363	4,909	4,130	5,065	6,130	8,510	8,173
Net Debt (Net Cash)	4,494	4,843	5,657	6,040	6,230	7,325	7,311	7,185	9,720	12,632
Cash to Debt Ratio	0.60	0.54	0.47	0.42	0.44	0.36	0.41	0.46	0.47	0.39

Source: Accenture, Khaveen Investments

Positively, its net debt only represents 5.9% of its market cap. Also, its EBITDA interest coverage stood at 323.6x in 2021, indicating a healthy ability to repay its debts. Nonetheless, we believe that its rising debt could pose a risk to its ability to execute future M&A activity to enhance its capabilities and could affect its competitive positioning and growth outlook.

Valuation

Our forecasted revenues for the company are as discussed previously and as per the table below.

Company Revenue ($ bln)	2019	2020	2021	2022F	2023F	2024F	2025F	2026F
Accenture	43.2	44.3	50.5	59.86	63.10	66.51	70.11	73.90
Growth %	5.4%	2.6%	14.0%	18.5%	5.4%	5.4%	5.4%	5.4%

Source: Accenture, Khaveen Investments

To value the company, we used a DCF analysis as we expect the company to generate strong cash flows. Our terminal value is based on the industry average EV/EBITDA of competitors in the IT consulting industry.

Based on a discount rate of 11.2% (company’s WACC), our model shows a downside of 0.14%.

Verdict

In this analysis, we examined Accenture’s M&A track record and believe it enhances its M&A capabilities as evident by its recognition by research firms as the top in areas of IT consulting. Further, we projected its growth relative to competitors based on the markets it served and derived a CAGR of 5.41%. Moreover, the company has a solid branding and reputation with the highest number of awards and a top ranking compared to competitors as its market share increased in the past 10 years. We believe its reputation could lead to sustainable growth as its largest customer relationships grow. Lastly, we determined that the company has the highest average customer and employee reviews which we believe indicates the higher level of service provided to clients and expect this to enable it to command a premium over its cost as measured by its gross margins which we see it increasing further through 2026. Notwithstanding, our DCF valuation shows limited upside for the company with growth priced in. Overall, we rate the company as a Hold with a target price of $322.04.