Weak Accenture earnings kills all hopes of recovery of Indian IT sector in FY25. Details here

Kotak Institutional Equities believes that the weak Accenture results have killed all hopes of a recovery in FY25. Morgan Stanley also expressed concerns following Accenture's downward revision of its guidance for the fiscal year raised worries about the pace of revenue recovery for Indian IT.

Pranati Deva
Published22 Mar 2024, 03:33 PM IST
Kotak Institutional Equities believes that the weak Accenture results have killed all hopes of a recovery in FY25. Morgan Stanley also expressed concerns following Accenture's downward revision of its guidance for the fiscal year raised worries about the pace of revenue recovery for Indian IT.
Kotak Institutional Equities believes that the weak Accenture results have killed all hopes of a recovery in FY25. Morgan Stanley also expressed concerns following Accenture’s downward revision of its guidance for the fiscal year raised worries about the pace of revenue recovery for Indian IT.

Accenture's lackluster performance in the latest quarter, coupled with disappointing guidance, has raised concerns among analysts about the trajectory of Indian IT companies, extending into the financial year 2024-25. Previously, there was optimism among investors that performance would pick up in the second half of the calendar year. However, Accenture's subdued results have dampened expectations, leading to apprehension about the continued challenges faced by the IT sector in the upcoming fiscal year.

On March 21, the leading IT services provider globally revised down its revenue forecast for fiscal year 2024, citing economic uncertainty. This adjustment comes as clients have scaled back spending on consulting services. Accenture's updated outlook now anticipates full-year revenue growth to range between 1 percent to 3 percent, a reduction from its earlier projection of 2 percent to 5 percent.

Read here: Accenture secures $1.1 billion GenAI projects in Sep-Feb

Kotak Institutional Equities believes that the weak Accenture results have killed all hopes of a recovery in FY25.

"Accenture’s results and outlook reaffirm our expectations of cautious near-term demand. Accenture highlighted further cuts in short-cycle discretionary projects, a negative for companies such as Wipro, LTIM, Mphasis and Infosys where estimates incorporate some recovery in discretionary spending. Noting the weak near-term demand, we expect large IT services companies to start FY2025E with cautious guidance. Growth will vary considerably across companies on the basis of mega-deal ramp-ups, vertical exposure and discretionary spending. We expect a modest cut in expectations of larger companies where estimates are rationale and sharper cuts in estimates of mid-tier companies. TCS, Infosys and Cyient are our preferred bets in the sector," it said.

Following the weak accenture results the Indian IT pack also saw a massive correction with the Nifty IT index down as much as 3.6 percent in intra-day deals today and all its constituents trading in the red. In comparison, the Nifty was trading around half a percent higher.

Read here: TCS, Wipro to Infosys: Why are Indian IT stocks falling after Accenture share price crash — explained

In a post-results investor address, CEO Julie Sweet noted that in certain cases, spending on services surpasses software license costs, prompting clients to pause discretionary spending. She explained, "In uncertain macro environments, discretionary spending is reined in, prioritizing essential transformations over non-essential ones." Accenture highlighted a tightening of discretionary spending on smaller projects, with clients favoring cost optimization initiatives amid macroeconomic, political, and sector-specific uncertainties.

Along with Kotak, multiple other brokerages also aligned with the view of a cautious FY25.

Morgan Stanley also expressed concerns following Accenture's downward revision of its guidance for the fiscal year, coupled with cautious commentary, raising worries about the pace of revenue recovery for Indian IT. The brokerage maintains the view that the pace of recovery may be slower than anticipated, posing risks to revenue forecasts for FY25.

Read here: Accenture earnings: IT investors should wake up and smell the coffee

CLSA echoed similar sentiments, noting that Accenture's sharp downward revision suggests no significant pickup in the second half of FY24. The brokerage remains cautious on the domestic IT sector, which is currently in an earnings downgrade cycle, despite this trend not being reflected in current valuations.

Nomura retained a cautious stance, highlighting the absence of a discretionary spending revival. The brokerage reiterated a 'buy' call on Tech Mahindra in the large-cap space, and on Coforge, Birlasoft, and eClerx in the mid-cap segment. However, it holds a bearish outlook on TCS, Wipro, LTIMindtree, L&T Tech, and Mphasis, citing the lack of a revival in client discretionary spending linked to macroeconomic conditions.

Read here: Accenture cuts FY24 earning forecast over uncertain consulting revenues

Domestic brokerage Emkay also highlighted that Accenture's management commentary and guidance revision indicate ongoing softness in near-term demand due to client caution amid macroeconomic uncertainties. The revised guidance suggests a potential uptick in revenue growth in Q4 compared to the flat to low single-digit growth observed in H1.

Although the ramp-up of large deal wins may support growth for select Indian companies in FY25, Emkay believes that persistent weakness in discretionary spending jeopardizes the high single-digit growth estimates for large caps. It anticipates Infosys and HCL Tech's FY25 revenue guidance to reflect client caution in the near term.

Read here: Infosys, Wipro ADRs drop 2-4% after Accenture cuts FY24 revenue guidance

The Nifty IT index corrected by 5.5 percent in the last month, lagging behind broader markets by 4.6 percent, mainly due to subdued guidance from some global services peers for CY24. Emkay expects Accenture's guidance cut to impact near-term stock performance negatively.

Emkay's preference order for Indian IT firms ranks Infosys, HCL Tech, Tech Mahindra, Wipro, LTI Mindtree, and TCS among Tier-1 companies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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First Published:22 Mar 2024, 03:33 PM IST
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