Management consulting and technology services multinational Accenture Ltd’s results can be seen as a wake-up call for investors in Indian information technology (IT) stocks.
Monday’s 5% drop in the CNX IT Index was a long-due adjustment in share prices of software companies. The index had risen by about 20% in March, despite no signs of improvement in the IT industry’s prospects.
Also See Misplaced Optimism? (Graphic)
Accenture’s guidance miss in the second quarter and the weaker outlook it has given for the next two quarters are a reminder that things are rather grim for the IT services industry. (The firm ends its financial year at the end of August.)
Accenture had said revenues would grow between 6% and 10% on a year-on-year basis in the quarter ended February, but ended up with a mere 3% growth. It has also revised its guidance for the next two quarters by 8-10%. One of the key weaknesses in Accenture’s results was the 1% drop in consulting revenues and the fact that new bookings in the consulting division fell by about 10%.
According to a report by IIFL Capital, “The weakness in Accenture’s consulting business indicates cuts in clients’ discretionary spending. Our channel checks and interactions with Indian IT company managements indicate that such cuts have been high during December and January and new business flow has shrunk considerably for Indian vendors.”
The good news is that the outsourcing business grew by a healthy 9%. New bookings in this division grew by 15%. But as IIFL’s analysts point out, multinational companies, or MNC, vendors have an edge over Indian counterparts in winning mergers and acquisitions integration contracts. Analysts at Edelweiss Securities Ltd had said in an earlier report that MNC vendors are likely to perform better than Indian IT companies in a downturn owing to their close client relationships. So, while the decent growth reported by Accenture’s outsourcing division is encouraging, the same level growth cannot be expected for Indian IT firms.
In fact, the Indian IT industry is expected to see a slight drop in revenues in the next fiscal year in dollar terms. Whether IT stocks need to adjust further will depend largely on the guidance and commentary given by Infosys Technologies Ltd on 15 April.
Graphics by Ahmed Raza Khan / Mint