Accenture follows the September to August financial year. (Mint)
Accenture follows the September to August financial year. (Mint)

Accenture’s large orders imply steady demand, but soft  BFS growth a bugbear

  • In Q1FY20, Accenture saw record orders, driven by new-age services digital, cloud, and security
  • Services-wise, strong outsourcing deal wins indicate benign demand environment for Indian IT​

Accenture Plc.’s Q4FY19 financial results give a mixed picture of the Indian information technology (IT) sector, with record fresh bookings indicating steady demand.

In fact, new bookings in the August quarter amounted to $12.9 billion, up 19% from a year ago. New-age services, which include digital, cloud and security, drove fresh order bookings. This trend corroborates recent statements from the Indian IT sector of the growing importance of digital deals.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Accenture follows the September to August financial year.

Services-wise, outsourcing drove orders, which augurs well for Indian IT. Outsourcing order bookings were up 46%. As Kotak Institutional Equities’ analysts said, outsourcing bookings have been volatile in the past fiscal. Even so, outsourcing orders were notably higher than bookings in the consulting division for the quarter.

Revenue growth has been stable. Constant currency revenues grew 7.2%. This is within the guide-to-range numbers, driven by resources, products, healthcare and public service divisions.

However, banking and financial services (BFS), a large business vertical for Indian IT companies, continued to lag other business verticals.

This warrants caution. Revenue from this vertical sequentially improved thanks to notably better pockets such as insurance.

Weakness in Europe, however, is weighing on overall growth, which is a headwind for Indian IT. “The continuing revenue decline in financial services in Europe primarily stems from weak tech spending of European banks," Kotak Institutional Equities said in a note.

“We believe that IT spending in financial services will be modest in 2019, after a strong 2018," it added. According to Kotak, the impact on IT companies varies, depending on the exposure to clients with modest tech spend or those re-jigging expenditure.

Accenture’s $10.9 billion-11.2 billion revenue guidance for the current quarter (Q1FY20) slightly lagged Street estimates. Its management expects IT services’ growth in FY20 to mimic growth rates in the fiscal year gone by. But clearly everyone is not convinced. Not just because of the continuing headwinds of shrinking interest rates and bond yields in banking and financial services, but because a larger percentage, i.e about 60% of Accenture’s revenue, stems from new-age services. Indian companies are also seeing good demand for digital, or the so-called new-age services. The revenue contribution, though, is less. Close to one-third of Tata Consultancy Services’ revenues come from digital. As such, an area of concern is attrition. Accenture’s results show a rise in employee attrition. New digital services businesses need newer skilled talent. Additionally, hiring is increasingly happening closer to the customer. As IT companies across the board are stepping up hiring and with talent not keeping pace, employee and outsourcing costs are mounting. This is another area investors need to track.