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Accenture’s healthy order-wins underpin optimism in IT stocks

Accenture’s guidance of 2-5% growth for FY21 is slower and is a story of two halves with H1 growth likely in the -3% to 0% range followed by high single digit to low double-digit growth in H2

Accenture Plc’s latest results strengthen the street’s expectations of a recovery in the IT sector. The global IT major reported a 1% fall in constant current revenues in the quarter ended August. However, outsourcing, where Indian IT has greater presence, held up, with revenues growing 7% from the year-ago. In the previous quarter, outsourcing revenue grew 5%. Note that Accenture’s fiscal year ends in August.

Order inflows were strong, with new bookings rising 9% to $14 billion. The outsourcing segment drove order wins, which is comforting news for IT firms. Orders in this segment grew 10% to $7.5 billion, the highest in recent quarters. “Sustained healthy momentum in outsourcing business revenue and booking augurs well for Indian peers," Emkay Global Financial Services Ltd said in a note.

The book-to-bill ratio is at 1.3 times, the highest in 25 quarters, said Jefferies India Pvt. Ltd. Book-to-bill is a ratio of new orders to completed sales. A ratio above one implies strong demand. “We understand these bookings could be lumpy, but they still indicate demand is on the path to normalization/recovery," Motilal Oswal Financial Services Ltd said in a note.

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New orders do not imply immediate boost to revenues. Moreover, economic disruptions because of covid-19 means that uncertainty persists. Accenture warns that its revenues can fall 3% or reach the year-ago levels (zero growth) at best in the current quarter.

Further, Accenture expects its next fiscal year to be subdued as well. The 2-5% revenue growth guidance for the fiscal year ending August 2021 is lower than the growth rates in the previous three years, and implies near-term sluggishness. However, the company sees growth rebounding from March 2021.

“Accenture’s guidance of 2-5% growth for FY21 is slower and is a story of two halves with H1 growth likely in the -3% to 0% range followed by high single digit to low double-digit growth in H2," Nirmal Bang Institutional Equities said in a note. “Among the assumptions driving a H2 FY21 pick up (which coincides with H1 FY22 of Indian players) are a pickup in macro-economy, strategy and consulting making a comeback, larger transformation programs being executed, and base effect," it said.

The commentary is broadly in line with the guidance provided by domestic IT majors. Domestic IT companies are indicating heightened demand for digital services, though some Indian firms had indicated a sharp recovery in H2FY21.

However, the broad trajectory is upward and investors may not mind if, like Accenture’s guidance suggests, things pick up meaningfully next fiscal year. Valuations of Indian IT stocks are already reflecting much optimism, but the September quarter results of Indian IT firms will provide clarity on the pace of recovery.

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