Mixed Signals at Accenture

Technology, outsourcing and consulting major Accenture Inc. (ACN - Snapshot Report), recently secured a contract extension worth $160.0 million for 7 years from Educational Testing Service (ETS), which is an organization involved in education assessment and psychometric research. This contract extension empowers Accenture to manage the supply chain process of the company.

As per the terms of the agreement, Accenture will continue to manage all aspects of the supply chain, including printing, publishing, warehousing, distribution and shipping of test material to 160 countries. The company has inked a few deals in the recent past, but the number of such wins has reduced.

A couple of weeks back, Accenture was awarded a contract by the Singapore Ministry of Health. Accenture will be implementing the National Electronic Health Record (NEHR) system across Singapore to help the country's government achieve an integrated healthcare structure, thereby marking Singapore one of the initial countries to use an NEHR system. The system is expected to initialize by April 2011.

The company has witnessed mediocre business flow during the first half, but on the positive side, it enjoyed increased demand for offshore application work from its Indian clients.

However, other rivals of the company, such as Capgemini are also trying to grab a chunk of this increased demand from the Indian market. As per the latest management guidance, Capgemini expects to grow revenue in the 3% to 5% range for the second half of 2010. Additionally, other competitors such as International Business Machines (IBM - Analyst Report) and Hewlett-Packard Company (HPQ - Analyst Report) are also eyeing the Indian market. With so many contenders looking for a share of India's growth, Accenture's win rate may not be that high.

Besides, we are also concerned about the company's growth prospects in the European market, as unfavorable market conditions may continue to pose challenges.

We remain cautious about Accenture, given its poor top-line performance in the recent past. During the May quarter, Accenture's consulting and outsourcing bookings were down 7.0% from the year-earlier level, while the amount generated through new deal wins reduced substantially. The company is also facing stiff competition and an unfavorable pricing environment. Although, management expects 5% to 9% revenue growth for the upcoming quarter, we are apprehensive about the achievement of this target.

Accenture currently has a short-term Zacks #4 (Sell) Rank.

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