Many analysts tracking the domestic IT sector have turned a bit cautious on outlook for the sector following Accenture’s Q1 results. The Dublin-based firm delivered a strong Q1 results (September-November quarter), with revenue growth coming in higher than the upper end of its guidance. The commentary for Q2 too was robust, but the IT major did not increase its FY23 revenue guidance.
The IT major maintained its annual revenue growth guidance of 8-11 percent in constant currency terms and indicated softening of demand for IT services. A decline in attrition could be tailwinds for IT firms, but many analysts cited delays in decision-making and changes in the pace of spending as reasons to worry about.
To be sure, Accenture is a behemoth in the consulting and IT services space. It reported $62 billion in revenues in FY22. Outsourcing accounts for a very large part of its revenue (45 per cent on TTM basis, the other being consulting), where it is up directly in competition with Indian IT players like TCS, Cognizant Technology Solutions, Infosys, Wipro, HCL Technologies and Tech Mahindra.
Accenture, analysts said, noted that certain industries are facing higher impact from macroeconomic uncertainties and are thus re-prioritizing spends towards cost initiatives.
Nomura India said the revenue growth outlook for Indian IT services for FY24 has continued to worsen. This is based on the weaker financial performance of end enterprise clients and its recent survey among industry participants, it said, which suggests a significant impact of high inflation on tech spending patterns of enterprises.
“We maintain our cautious stance on the demand outlook and think consensus’ revenue growth estimates for FY24E may see downward revisions,” Nomura India said.
For the Q1, Accenture’s revenue rose 5 percent YoY to $15.7 billion. It was up 15 percent in local currency. Revenues were about $150 million above the upper end of the guidance, after adjusting for forex. Accenture expects Q2FY23 revenue at $15.2-15.75 billion, assuming a negative 5 percent foreign-exchange impact (6-10% YoY in local currency).
For FY23, operating margin is expected to expand by 10-30 basis points to 15.3-15.5 percent.
Nirmal Bang Institutional Equities said Accenture is seeing delays in decision-making and changes in the pace of spending. This implies that H2FY23 organic revenue growth (coinciding with H1FY24 for Indian peers) could potentially fall into low-mid single-digit territory – a sharp deceleration from 21 per cent organic growth delivered in FY22, it said.
Nirmal Bang said Accenture has warned that against a very tough comparable Q2FY23, order inflow growth (YoY) will likely be soft, especially in consulting work. Longer term, it is of the view that ‘compressed transformation’ is going to be a decade long phenomenon, with customers wanting to move beyond just cloud migration to extract the full value of the cloud.
“While we agree with that view, we believe that the structural growth acceleration is unlikely to be anywhere close to the growth seen during the pandemic phase. Hence, it should not lead to significantly higher than pre-pandemic PE multiples, especially if structurally interested rates are higher than the near-zero levels seen in the last 15 years. At current valuations, we continue to advocate an “underweight” stance on the Indian IT sector and we believe that investors should use the recent rally to cut positions if one is overweight,” it said.
Emkay Global said Accenture’s Q1 operating performance was better than guidance, although the degree of outperformance was much lower compared to Q1 last year. Amid macro uncertainties, clients are turning cautious, leading to a slower pace of spending, delay in decision-making, and pause in smaller deals – this would constrain the near-term growth trajectory, Emkay said.
“Demand has clearly moderated due to macro weakness, but remains resilient; this should alleviate any concerns of sharp fall in demand. We prefer Wipro, Tech Mahindra, Infosys HCL Tech TCS in the tier-1 space; and Zomato, Mphasis, Birlasoft, Firstsource Solutions and Persistent Systems among mid-caps,” it said.
Meanwhile, Nuvama said Accenture reported Q1FY23 revenue growth at the top end of its guidance and maintained its FY23 guidance. While it continues to face challenges in consulting vertical, the outsourcing vertical continues to report strong growth, Nuvama said.
This brokerage said the decline in attrition reflects easing of the supply side situation and felt the results are a positive read-across for Indian IT services companies. It has maintained a positive stance on the sector and expects a sustainable strong demand environment to drive strong earnings growth for the sector, over the next three years.
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