Global IT giant Accenture’s earnings have been a mixed bag, with smaller-than-expected deals impacting revenue growth. The company reported sequential sales growth of 5 percent in constant currency (CC). Accenture follows a September-August fiscal year. With midcaps leading the way, Nifty IT lost more than 1 percent on Friday as US IT giant Accenture’s third-quarter earnings were read negative by its Indian IT peers.
While Accenture’s 5 percent annualized revenue growth was in line with the Street’s expectations, worrying investors, the lowering of the top of the FY23 revenue growth guidance by 100 basis points to 8-9 percent annualized is CC.
As Reuters reported, “Accenture reignited concerns about declining IT spending on Thursday with a quarterly revenue forecast that fell short of Wall Street estimates, sending its shares down more than 5 percent.”
“North America — Accenture’s largest market — also underperformed in the March to May period, with revenue growth there slowing to a nearly three-year low of about 2 percent,” the report added.
North America is also an important market for Indian IT companies. As US Federal Reserve Chairman Jerome Powell said on Wednesday that inflation remains high and more rate hikes are possible, the suffering for IT companies could continue in the near term.
What do analysts say?
Brokerage firm Motilal Oswal Financial Services deciphered the signals from Accenture’s Q3 numbers for Indian IT companies, pointing out that while Accenture reported revenue growth of 5 percent YoY CC in Q3, it cut the top end of its FY23 revenue growth guidance by more than expected. 100 basis points to 8-9 percent YoY (YoY) constant currency (CC), which is a negative signal for India’s IT companies.
“Accenture management highlighted the impact on the demand environment of adverse macroeconomic conditions, delays in small and discretionary deals, and a dip in deal prices in a few segments, all of which point to a near-term growth drag for our IT business. cover. We expect a near-term negative impact from the commentary on Accenture’s earnings,” said Motilal Oswal.
“Sharp moderation in booking growth even outsourcing suggests increasing scrutiny of IT spending. Lower contract profitability could be a drag on margins and this along with a subdued outlook for North America and CMT (communications and media advisory services) could pose risks to LTIM, TechM, Infosys and HCLT,” said Jefferies analysts Akshat Agarwal and Ankur. Pant.
With the industry still trading at 21x 1-year fwd PE (10 percent premium to 10-year average P/E) amid deteriorating demand prospects, the global brokerage is maintaining a cautious stance on the industry.
Kotak Institutional Equities said Accenture’s earnings in Q3FY23 showed weak discretionary spending, with growth led entirely by managed services.
Kotak said it will be challenging to generate returns in India-listed companies following a sharp rise in stock prices following the Q4FY23 results.
“CMT (Communications, Media and Technology) is notable for weak performance. Tech Mahindra is the most vulnerable with 39 percent exposure to the segment. Financial services growth has also slowed, especially in North America. These two industries are the biggest drag on growth,” said Kotak.
“Growth in North America has slowed to 2 percent, much of it through CMT and financial services. Furthermore, the results indicate that the nature of demand is shifting from discretionary to a mix of cost deductions and discretionary. Nuclear modernization is also getting a greater focus,” Kotak noted.
Similarly, brokerage firm ICICI Securities believes there could be a downward revision of FY24 earnings estimates for Indian IT companies.
“Accenture pointed to weaknesses in the vertical communications media and technology, and the strategy and consulting practice. We still have a ‘downgraded’ rating on Tech Mahindra (40 percent revenue from communications) and Wipro (reaching almost 15 percent revenue from consulting),’ said ICICI Securities.
“The impact of generative AI (artificial intelligence) on IT services is still evolving. RoIs (return on investment) have yet to be determined for generative AI use cases. The managed services business is outperforming consulting in terms of both revenue growth and order bookings for Accenture and implies resilient demand for operations and managed services work for IT service companies,” said ICICI Securities.
Nomura said it is concerned about the demand outlook for Indian IT services and expects revenue growth to slow 480 bps (at 6.1 percent year-over-year) in FY24F versus FY23F for large caps.
“ACN’s lowering of revenue expectations points to a continued decline in demand for IT services. The moderating momentum in deal bookings (due to lower-than-expected shorter-term projects) and overall headcount reductions, we believe, indicate increasing near-term demand uncertainty for the industry,” Nomura said.
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