Accenture results portend gloom for Indian IT sector
Accenture Plc’s latest quarterly results suggest there’s further gloom in store for Indian information technology (IT) companies.
Accenture’s revenues for the quarter ended November rose 7% year-on-year (y-o-y) in constant currency terms, and missed the Street’s estimates by about one percentage point. Earlier this year, growth had been in double digits.
The fact that Accenture’s growth rates are declining despite its superior business mix is disconcerting. Analysts at Nomura Research said in a note to clients, “1Q results and the FY17 outlook does suggest slowing trends at Accenture across consulting; banking, financial services and insurance (BFSI); healthcare, and communications, which is a negative read-across on demand for Indian IT.”
But the big worry, as far as Indian IT services companies are concerned, is the decline in outsourcing bookings. In the past 12 months, outsourcing bookings have fallen by 4% in dollar terms, even as consulting bookings have risen by 12%. Indian IT firms have a much larger dependence on traditional outsourcing work vis-a-vis consulting, and the decline in demand is clearly worrying.
What’s more, the company told analysts in a call that there is severe pricing pressure in the application maintenance segment. “Application development and maintenance contribute around 35-40% of revenue for tier-1 IT firms, with maintenance likely to be closer to 20-25% of revenue. This remains the most sluggish of segments for tier-1 IT with 4% y-o-y growth in the past 12 months,” analysts at Nomura Research pointed out in a note to clients. The commentary about pricing pressure suggests things could get worse on the growth front for Indian IT.
And while Accenture enjoyed double-digit growth in new services such as cloud, security and digital, note that more than 40% of its revenue came from these services. The contribution of new services is much lower (less than 20%) for Indian IT firms. As such, they are unlikely to drive growth meaningfully for them.
Despite this gloomy scenario, Indian IT stocks have outperformed the broader market in the past two months, largely because of the demonetization hit on stocks that depend on the domestic economy. As such, even if the December quarter results are subdued, the correction in IT stocks may be limited because of the lack of decent alternatives.