Home / Markets / Mark To Market /  Why Accenture guidance is good news for Indian IT companies

For investors in Indian IT stocks, there are a couple of positive takeaways from Accenture’s Q3FY21 result.

The IT firm saw strong constant currency revenue growth of 16% year-on-year. The growth, aided by a low base, beat Bloomberg’s consensus estimates by 400 basis points (bps) and the top end of its own guidance by 300 bps. This bodes well for tier-I firms such as Tata Consultancy Services, Infosys and HCL Technologies as Accenture’s earnings are often seen as an indicator for Indian IT companies’ future performance.

Accenture saw 39% year-on-year growth in order inflow in Q3FY21 to $15.4 billion with outsourcing order inflow up 52% at $7.4 billion. Both consulting and outsourcing segments grew 16% y-o-y in local currency terms, with outsourcing posting the highest y-o-y growth over the last six years.

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Robust recovery

In a post-earnings conference call, the firm’s management said the pipeline continues to be strong even for large deals. In the outsourcing segment, Accenture competes directly with Indian IT players in a significant way. So analysts expect this to have a positive rub-off effect on Q1FY22 earnings of the sector. Importantly, Accenture raised its local currency revenue growth guidance for FY21, which ends in August, from 6.5-8.5% earlier to 10-11%. This is a marked improvement from the 2-5% guidance it had shared at the start of FY21.

According to its management, while Accenture made some acquisitions recently, the upward revision in guidance has been driven solely by organic growth. “The strong Q3FY21 results, and the improved FY21 revenue guidance indicates strong near-term momentum that should likely signal a strong growth performance for Indian peers going into Q1FY22 and should allay concerns on continuation of strong growth," said analysts at JM Financial Institutional Securities Ltd.

On the flip side, with improving demand for talent, concerns on high attrition impacting margins remain. Accenture’s attrition rate increased annually and sequentially in Q3FY21. On a quarter-on-quarter basis, Accenture’s attrition rate increased by 500bps. The firm’s management also indicated that benefits from lower travel costs are behind starting Q3FY21. Against this backdrop, analysts said that supply pressure would remain a concern and a potential margin drag for Indian IT services companies in FY22.

Meanwhile, key Indian IT stocks continue to trade at rich valuations. On a one-year forward price-to-earnings (PE) basis, the top five Indian IT stocks are trading at a multiple of around 26 times, pointed out analysts at Jefferies India Pvt. Ltd. This is much higher than the 10-year PE average of 18 times of these companies.

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