Fitch Ratings has affirmed the 'A+' long-term (LT) and 'F1' short-term (ST) ratings, including the LT and ST Issuer Default Ratings (IDRs), of Accenture plc and its wholly-owned subsidiaries, Accenture Capital, Inc. and Accenture Global Capital DAC.

Fitch has also affirmed the 'A+' senior unsecured ratings and 'F1' commercial paper ratings for the wholly-owned subsidiaries. The Rating Outlook is Stable.

The ratings and Outlook reflect Accenture's strong operating and financial profile due to its market leadership as the largest independent consulting provider with a global footprint at scale and largest revenue mix of digital solutions. Strong financial flexibility and conservative financial structure should continue to support acquisitions of digital capabilities and capital returns with cash flow. Accenture's diversified industry and customer relationships and high recurring revenue model drives Fitch's expectations for solid operating performance through macroeconomic cycles.

Key Rating Drivers

Strong Market Position: Accenture's global scale and leading market positions enable the company to capitalize on secular growth in digital, cloud and security spending. Despite near-term revenue pressure due to the pandemic, Accenture continues to expand share with its customer base. Accenture's significant organic and inorganic investments in developing new capabilities, combined with its broad-based industry and customer exposure have enabled the company to continue to meaningfully outpace the growth rates of its closest multinational competitors, International Business Machines Corp. (IBM), Kyndryl Holdings (Kyndryl; BBB/Stable) and DXC Technology Company (DXC; BBB/Stable), the latter two of which are facing top line headwinds from a greater mix of legacy service offering.

Expectation for Minimal Leverage: Absent a significant acquisition, which is inconsistent with Accenture's growth strategy, Fitch expects the company will remain largely debt free given its ability to fund tuck-in deals with cash flow. Even assuming the company drew on its $3 billion CP program, leverage metrics would remain near zero. However, Fitch believes Accenture has grown increasingly comfortable with debt over time, and were a large acquisition contemplated, would become a first-time issuer. Fitch believes that Accenture views its credit profile as a strategic asset as it bids for long-term consulting and outsourcing partnerships with customers.

Building Capabilities Through Acquisitions: Fitch expects Accenture will remain acquisitive as the company builds digital, cloud and security capabilities and strengthens its industry practices. However, Fitch anticipates acquisitions will be small tuck-in deals focused on enabling technologies or talent within the context of an increasingly competitive labor market. The IT service industry's marginal ability to maintain differentiated products and services drives dependency on hiring and retaining talent. Fitch forecasts acquisition spending will represent roughly 25%-30% of pre-dividend FCF, up from less than 20% on average over the past four years.

Resilient Operating Model: Accenture's ratings reflect its top-line stability through recurring, long-term outsourcing contracts (nearly half of revenues). This stability is reflected in Accenture's steady performance through the global pandemic. Fitch believes Accenture's diversified geographic, vertical and services revenue also buffer the company from cyclical pressures, supported by robust new bookings in digital, cloud and security services. Despite the top-line pressure in the last two quarters of fiscal 2020, the company managed costs and expanded margins for the year. During the 2008-2010 downturn, revenues declined by less than 10%, while operating margins remained in line with historical trends, demonstrating the company's ability to manage costs through a cycle.

Low Margins, Cash Flow for the Rating: Fitch expects Accenture's profit margins will remain low for the current rating category, although the company has solid operating profit margins compared with its IT services peer group. Efficiency initiatives, including shifting costs from high- to low-cost geographies and higher order technology projects, have driven profit margin expansion. However, Fitch expects additional uplift will be constrained by the higher cost of talent acquisition and incremental acquisitions operating at sub-scale.

Derivation Summary

Accenture is strongly positioned at the current rating, given the company's leading and diversified service capabilities that drive consistently above-market revenue growth. Meanwhile, the company's conservative financial policies, underpinned by negligible debt and strengthening recurring FCF driven by cumulative investments in developing digital and cloud offerings, position Accenture in-line with a strong-'A' to weak-'AA' rating.

Accenture has outperformed other large independent IT services peers, including IBM, Kyndryl and DXC, due in part to fewer acquisitions and secular headwinds related to legacy businesses. Its consulting peers are growing faster than Accenture, but lack the diversification of service offerings, while India-based IT services firms benefit from a low-cost model, but remain challenged moving up the technology stack, due in part to their comparatively low financial flexibility. Fitch anticipates Accenture's balance sheet to remain debt free beyond any short-term uptick, given the FCF generation and management's strategic commitment to maintaining a strong investment-grade rating.

Key Assumptions

Low- to mid-single digit revenue growth through the forecast period, driven by leveraging significant installed base across expanding platform set;

Ongoing investments in digital transformation capabilities, including integrating acquisitions, result in relatively flat profit margins;

Capital intensity of 1.5%;

$2 billion of annual acquisitions targeting capabilities and, therefore, acquiring no revenue or profitability;

Double-digit annual dividend growth with FCF acquisitions used for share repurchases and redemptions.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation for FCF margins sustained above 10%;

Sustained low to mid-single digit revenue growth, while maintaining a conservative financial policy.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Aggressive debt financed acquisition strategy;

EBITDA leverage sustained above 1.25x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Fitch believes Accenture's liquidity is strong and, as of Nov. 30, 2022, consisted of available cash and cash equivalents of more than $8.0 billion and $3.0 billion of availability under its undrawn revolving credit, which fully back-stops the company's $3.0 billion commercial paper authorization. The company has no debt on its balance sheet. Fitch expects more than $6.0 billion of annual FCF, which will support acquisitions and shareholder returns.

Issuer Profile

Accenture is the largest independent global consulting company with over 500,000 employees serving clients across three geographic segments: North America, Europe and growth markets.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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