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Global IT company Accenture’s impressive Q4FY21 earnings have positive takeaways for the Indian technology sector.

Accenture reported revenues of $13.4 billion in Q4, which was at the upper end of its guidance. For FY22, the firm foresees revenue growth of 12-15% despite acquisitions. This is impressive and indicates that the demand momentum for Indian IT services would remain strong, according to analysts. This bodes well especially for tier-1 technology firms such as TCS Ltd, Infosys Ltd and Wipro Ltd since Accenture’s performance is often seen as an indicator for the sector’s overall future prospects.

“The company’s 4QFY21 performance alongside revenue outlook continues to confirm the overall demand momentum," analysts at JM Financial Institutional Securities Ltd said. “In addition, strong net hiring of around 55,500 employees, the highest quarterly additions ever, continues to reinforce the trend of strong offshore-led hiring with the strong hiring expected to continue in the upcoming quarter as well," they said.

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The domestic brokerage house expects Indian IT firms to report strong revenue growth in the Q2FY22 earnings season.

However, the IT sector could face some short-term challenges. Accenture’s outsourcing revenue, which is more relevant for the Indian IT industry, is guided to grow in high single digits to low double digits, analysts at ICICI Securities Ltd pointed out. This hints at deceleration in the outsourcing segment versus the current year’s annual growth of 13% in constant currency terms, the report said. Outsourcing bookings of Accenture were weak at $7.1 billion, a year-on-year decline of 5.6%.

Secondly, Accenture’s attrition increased to 19% on annualized quarterly attrition from 17% in May 2021 quarter and 7% in August 2020 quarter. Analysts at Kotak Institutional Equities said they expect a similar trend for IT stocks under their coverage universe. They feel the talent crunch is severe and will remain substantial for a few quarters.

What does this mean for Indian IT stocks and their valuations?

The Nifty IT index has been one of the best-performing indices in the past one year, surging 97%. This index is now trading at a valuation premium of around 80 times compared to its long-term average, analysts noted. They see some more upside in IT stocks on buoyant demand scenario, but supply side pressures could cap any further rally. That said, valuations may remain expensive.

“(Accenture’s) 20% growth in order inflow in FY21 at $59 billion and commentary that the pipeline continues to be strong indicate that the low teen growth expectation that the Street has built in for Indian IT players for FY23 is realistic," analysts at Nirmal Bang Securities Ltd said in a report on 24 September.

It could help sustain the high price-to-earnings multiples that they are trading at, but may not help much in expanding them further, the report added.

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