Global IT giant Accenture’s earnings were a mixed bag, with smaller-than-expected deals impacting revenue growth. The firm posted sequential revenue growth of 5 per cent in constant currency (CC) terms. Accenture follows a September-August financial year. With midcaps leading the downside, Nifty IT lost over 1 per cent on Friday as the Q3 result of American IT major Accenture had a negative readthrough for its Indian IT peers.
Although Accenture’s revenue growth of 5 per cent YoY CC was in sync with the Street’s expectations, what worried investors is the lowering of the upper end of its FY23 revenue growth guidance band by 100 bps to 8-9 per cent YoY CC.
As Reuters reported: “Accenture fanned concerns about dwindling IT spending on Thursday with a quarterly revenue forecast that was below Wall Street estimates, sending its shares down more than 5 per cent.”
“North America – Accenture’s biggest market – also performed poorly in the March to May period, with revenue growth slowing there to a near three-year low of about 2 per cent,” the report added.
North America is a key market for Indian IT firms too. As US Federal Reserve Chairman Jerome Powell said on Wednesday that inflation remains elevated and more rate hikes are possible, suffering for the IT companies may continue in the short term.
What Do Analysts Say?
Deciphering the cues from Accenture’s Q3 numbers for Indian IT firms, brokerage firm Motilal Oswal Financial Services pointed out that even though Accenture reported revenue growth of 5 per cent YoY CC in Q3, ahead of expectations it has lowered the upper end of its FY23 revenue growth guidance band by 100 bps to 8-9 per cent year-on-year (YoY) constant currency (CC), which is a negative signal for the Indian IT companies.
“Accenture management highlighted the impact on the demand environment from adverse macro, delays in small and discretionary deals, and a dip in deal pricing in a few segments, all of which indicate a drag on near-term growth for our IT coverage. We expect a negative near-term impact from the Accenture earnings commentary,” said Motilal Oswal.
“Sharp moderation in bookings growth in even outsourcing suggests rising scrutiny on IT spends. Lower contract profitability could be a drag on margins and this along with a muted outlook for North America and CMT (communication and media consulting services) could pose risks to LTIM, TechM, Infosys and HCLT,” Jefferies analysts Akshat Agarwal and Ankur Pant said.
With the sector still trading at 21x 1-year fwd PE (10 per cent premium to 10-year average PE) amidst a worsening demand outlook, the global brokerage has maintained a cautious stance on the sector.
Kotak Institutional Equities said Accenture’s Q3FY23 earnings showed weak discretionary spending continues with growth led entirely by managed services.
Kotak said generating returns in India-listed companies, after a sharp stock price rally post-Q4FY23 results, will be a challenge.
“CMT (communications, media and tech) stands out in terms of weak performance. Tech Mahindra with 39 per cent exposure to the segment is the most vulnerable. Financial services growth has also slowed down, especially in North America. These two verticals are the biggest drag on growth,” said Kotak.
“North America growth has slowed down to 2 per cent with a lot of it flowing through CMT and financial services. Further, results indicate that the nature of demand is shifting from discretionary-led to a mix of cost take-out and discretionary. Core modernization is receiving a larger focus as well,” Kotak pointed out.
On a similar line, brokerage firm ICICI Securities believes there could be a downward revision of FY24 earnings estimates for Indian IT companies.
“Accenture called out weaknesses in communication media and technology vertical and strategy and consulting practice. We continue to have a ‘reduce’ rating on Tech Mahindra (40 per cent revenue from communication) and Wipro (derives nearly 15 per cent revenue from consulting),” ICICI Securities said.
“The impact of generative AI (artificial intelligence) on IT services is still evolving. RoIs (return on Investments) are yet to be established for generative AI use cases. The managed services business is doing better than consulting in terms of both revenue growth and order bookings for Accenture and implies resilient demand for operations and managed services work for IT services companies,” said ICICI Securities.
Nomura said it is concerned about the demand outlook for Indian IT services and expects 480 bps slower revenue growth (at 6.1 per cent YoY) in FY24F vs FY23F for largecaps.
“Lowering of revenue guidance by ACN indicates continued softening demand for IT services. Moderating deal bookings momentum (due to lower-than-expected smaller duration projects) and cut in total headcount indicate rising near-term demand uncertainty for the industry, in our view,” Nomura said.
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