IT investors find little comfort in Accenture results

Analysts say large IT companies tend to mirror Accenture’s performance with some lag.  Photo: Mint
Analysts say large IT companies tend to mirror Accenture’s performance with some lag. Photo: Mint

Summary

IT investors looking for meaningful clues from Accenture Plc’s Q1FY23 results are in for some disappointment.

Recently, HCL Technologies Ltd had said that it expects FY23 revenue growth to be at the lower end of the guidance of 13.5-14.5% in constant currency (CC) terms. Amid looming worries on demand slowdown, investors in Indian information technology (IT) services companies’ stocks looking for meaningful clues from Accenture Plc’s Q1FY23 (three months ended November) results are in for some disappointment. Accenture follows a September-August financial year.

Analysts say large IT companies tend to mirror Accenture’s performance with some lag. Accenture has maintained its revenue growth guidance for FY23 at 8-11% in CC terms. This is even after Q1FY23 year-on-year CC revenue growth was at 15%, above its guided range of 10-14%.

Accenture's Q1FY23 constant currency revenue growth of 15% was ahead of its guidance
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Accenture's Q1FY23 constant currency revenue growth of 15% was ahead of its guidance (Company data, Jefferies)

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Accenture retaining its guidance for the full year implies weakening of growth in the second half of FY23 (H2FY23). This does not bode well for the outlook of Indian IT services companies. Accenture’s implied H2FY23 CC growth guidance of 5.6-9.6% y-o-y versus 25% y-o-y in H2FY22 suggests a sharp revenue growth moderation for Indian IT in FY24, reckon analysts from Jefferies India. Another takeaway from Accenture’s results for Indian IT companies, according to Jefferies, is increasing client focus on larger cost optimization deals and slowdown in smaller deals position larger IT firms more favourably than mid/small firms.

Accenture revenue growth in Q1 was led by the outsourcing segment while consulting was relatively tepid. New bookings for outsourcing grew by 10%, but fell by 14% for consulting.

“Outsourcing revenues (+20% y-o-y in CC terms) – more relevant for Indian IT players – remained resilient. Accenture’s strong outsourcing order booking in FY22 lends support," said analysts from JM Financial Institutional Securities Ltd. “However, lowest book-to-bill in outsourcing post pandemic (1.1x) indicates pace of booking might be slowing. Sharp reduction in attrition (down 7 percentage points QoQ) suggests hiring moderation across the industry. Overall, we believe Accenture’s result does little to clarify the murky demand picture for India IT players," the brokerage said.

Shares of Indian IT companies reflect the concerns of the expected slowdown in growth rates in FY24 led by muted demand. So far in CY22, the Nifty IT index has fallen by 26%, while the Nifty 50 index has gained 6%. It helps that margin outlook ahead is relatively better supported by lower attrition rate. On the flipside, worse than expected slowdown could further weigh on IT stocks.

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