Is Accenture making things worse for Indian IT?
Investors were underwhelmed by Accenture Plc’s results for the quarter ended February 2017. While revenue was more or less in line with expectations, new order bookings fell below expectations, and so did the company’s outlook for the consulting business. Accenture’s shares have fallen by around 4% since the results were announced last week.
Some analysts have cheered the relatively higher growth in the company’s outsourcing business, suggesting this augurs well for India’s IT services industry. Outsourcing services grew 8% in constant currency terms last quarter, compared to 5% growth in consulting services. This is the first time in two years that Accenture’s outsourcing segment has outgrown its consulting practice.
But as analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd point out, “(The outsourcing segment) is largely market share gain-driven and cannot be read positively from an Indian IT perspective, in our view.” In other words, the pickup in Accenture’s outsourcing business may well be coming at the expense of Indian IT, with which it competes directly.
Worse still, the analysts add that the heightening of immigration fears could put the multinational firm in an advantageous position in this segment versus Indian IT, which is far more dependent on H-1B visas. Not very long ago, Indian investors were celebrating the fact that Tata Consultancy Services Ltd’s (TCS’s) market capitalization exceeded the combined value of Accenture and Cognizant Technology Solutions Corp. Now, Accenture’s value exceeds that of TCS by around $5.5 billion.
Note that Accenture’s new order bookings fell by 4% year-on-year and were below expectations. Growth in the key North American region fell to 4%, compared to double-digit growth a year ago. Company-wide growth has more-or-less halved in the past one year. These aren’t comforting signs for Indian IT, by any stretch of imagination.
Some analysts see the relatively higher growth in Accenture’s outsourcing business as a positive for Indian IT, since it points to a shift in the nature of digital spends by customers, which may provide more opportunities for Indian companies. The argument goes that digital has moved beyond the consulting phase and is now scaling up, where Indian IT’s capabilities will be required. It would be prudent for investors to look for more datapoints that attest this.
For now, what’s working in the favour of IT stocks is that since valuations are low when compared to the broad market, they have takers when stocks fall below a certain threshold. Although revenue growth has come down substantially, these companies still generate high amounts of cash, and have lately increased payout ratios.