Accenture Q2 hardly clears the fog for IT cos
2 min read 26 Mar 2023, 07:56 PM ISTWhile Q2 revenue growth was ahead of expectations, Accenture has narrowed its full-year constant currency revenue guidance to 8-10% from 8-11%
PremiumThe Indian IT industry has been in a turbulent phase for quite some time now. Fears of an imminent recession have battered sentiments. Add to that the crisis in the US and European banks, which is fuelling worries of medium-term revenue visibility for technology companies. The banking, financial services, and insurance (BFSI) vertical is a crucial revenue generator for the IT industry. So, a scenario of lower digital spends by BFSI clients is undesirable.
In this backdrop, it is natural for wary IT investors to keep looking for clues on what lies ahead. IT giant Accenture’s earnings are often seen as an indicator for the performance of the Indian IT sector. Accenture, which follows a September to August financial year, last week announced its Q2FY23 earnings, which had its share of hits and misses. In constant currency terms, it reported 9% year-on-year (y-o-y) revenue growth, which was at the upper end of its 6-10% guidance range. Revenue growth during the quarter was led by its managed services segment. Note that Accenture competes with tier-1 IT firms in this segment.
While Q2 revenue growth was ahead of expectations, Accenture has narrowed its full-year constant currency revenue guidance to 8-10% from 8-11%. This was in spite of stellar deal bookings during the quarter. So, some analysts caution that this could point to moderating IT demand. Given the ongoing uncertainties in the financial sector, there is a possibility of this guidance getting further revised.
That said, Accenture’s order book was in good stead. In fact, new bookings at $22.1 billion were the highest ever. As the alongside chart shows, the managed services segment saw a robust y-o-y jump in bookings, although the consulting segment lagged. According to the Accenture management, demand for large transformation deals is increasing, with focus on modernization and cost take-out deals.
The shift in deal mix could mean an increased preference for tier-1 IT firms over tier-2, considering the former’s scale. “Accenture continues to indicate a slowdown in smaller, short-cycle orders, which we suspect are largely digital in nature. This we believe could have negative implications, specifically for tier-2 players," said analysts at Nirmal Bang Institutional Equities in a report dated 24 March. Also, remember, relatively expensive valuations of tier-2 tech firms has been a sore point for investors.
In an attempt to drive structural cost reductions, Accenture is looking at a headcount cut of 19,000 by FY24. Also, net hiring in Q2 was at a multi-quarter low and is expected to remain subdued in Q3 as well. Analysts note that trends of weak hiring and easing attrition could provide some margin tailwinds to Indian IT companies.
Despite the positives in Accenture’s Q2 performance, a meaningful turnaround for Indian IT stocks depends on many other factors. So, investors should not get carried away. “Simplistic logic would suggest extrapolation of strength in outsourcing growth and bookings at Accenture to tier-1 IT," said analysts at Ambit Capital Pvt. Ltd. However, this has to be looked at in the context of Accenture (managed services) outpacing tier-1 IT for last 14 quarters, added the Ambit report dated 24 March.
Meanwhile, in the last one year, the Nifty IT index has declined by 23.5%. After such a steep correction, the sector’s once hot valuations have also cooled off. “We do not expect any negative surprise in Q4FY23 earnings of Indian IT companies. However, the momentum at which IT stocks will recover from hereon will also depend on developments related to US banking situation," said Omkar Tanksale, senior research analyst at Axis Securities Ltd.
