What do brokerages say on the Indian IT sector after Accenture’s better-than-expected results?

Information Technology (IT) services firm Accenture, which follows a September-August financial year, on Thursday reported that revenue grew 9 percent in local or Constant Currency terms to $15.8 billion in the second quarter of FY 23.

Accenture’s revenue was better than the $15.2-15.75 billion it had guided for.

Industry-wise, the highest growth was posted by the resources segment, which grew 16 percent Year-on-Year (YoY) to $2.2 billion followed by health and public services which expanded 15 percent to $3.0 billion.

Also Read: Accenture layoffs: How much will it impact Indian ops and employees?

Financial services and products segments increased by 10 and 9 percent on a yearly basis to $3.0 billion and $4.7 billion respectively. Communications, Media and Tech segments remained flat at $2.9 billion.

Geographically, North America grew 5 percent YoY to $7.4 billion, Europe 12 percent YoY to $5.3 billion, and growth markets the highest at 13 percent YoY to $3.1 billion.

Positives outnumber negatives  

The slowdown in North America, and the hi-tech and communications verticals were a negative, but the results had more positives than negatives for Indian IT vendors, said investment manager Morgan Stanley.

Morgan Stanley says the company’s results could generate positive sentiment. Any weakness around its Q4 results and FY 24 guidance should be used as a buying opportunity, it added. The firm prefers LTIMindtree, Infosys and HCL Technologies among large-cap IT firms.

Accenture also reported record new bookings at $22.1 billion, a rise of 17 percent YoY, driven by managed services, which stood at $11.4 billion, while consulting bookings stood at $10.7 billion for the quarter.

“Managed Services bookings held up well and grew by 37% YoY cc (constant currency), while consulting bookings were up 2% YoY cc, reflecting continued emphasis on cost optimization projects vs. growth projects. Management remained positive around technology spends and indicated a strong deal pipeline for 3QFY23, especially in managed services,” financial services firm Jefferies said.

Caution among clients 

Management has highlighted caution among clients with delays in decision-making, particularly on consulting, and a slowdown in smaller deals, it added.

CLSA believes strength in the company’s order bookings should give comfort to investors and healthy managed services revenues/bookings was a positive read-through. Comfort should come, given supportive valuations after the recent correction, it added. It remains cautious on the IT sector and only rates Infosys a ‘buy.’

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Given the worsening global macroeconomic outlook, Accenture has lowered its annual revenue and profit projections and now expects annual revenue growth to be around 8-10 percent (with -4.5 percent forex impact) YoY in local currency or constant currency, compared with 8-11 percent (with -5.0 percent forex impact) expected previously.

“The guidance implies a belief in the soft landing narrative with pain largely behind us while we believe that pain from the rapid rate tightening that has happened in the Developed Markets (DM) as well as the recent banking turmoil in US/Europe is only ahead of us,” according to Nirmal Bang Securities.

Nirmal Bang is not sure whether the new guidance is pointing to a sustained recovery beyond FY 23 and whether that would be smooth. The firm has an ‘underweight’ stance on the IT Sector and believes consensus is underestimating growth and margin risks in FY 24/FY 25.

Also Read: IT services face risk due to banking challenges, says Bernstein research

Key takeaways 

The company also announced 19,000 layoffs globally, of which 7,000 employees are based in India.

“We have three key takeaways for Indian IT firms from Accenture’s 2Q results: 1) Rising caution among clients with focus on cost optimization suggests a moderation in growth in FY 24. This is evident from Accenture’s implied 2HFY23 revenue growth guidance of 4-8% YoY cc. 2) Increasing client focus on larger deals and slowdown in smaller deals position larger IT firms more favorably than mid/small sized firms; 3) A cooling off of the job market, lower attrition and more prudent hiring are likely to support margins,” Jefferies commented.

Demand continues to shift towards cost optimisation, says  Nomura, retaining its cautious stance on the sector and cutting the top end of its FY 23 revenue estimates and Constant Currency growth guidance. It expects operating performance to vary significantly across companies in FY 24. It prefers large-cap over mid-cap IT companies, with its top Picks being Infosys and Tech Mahindra in the former and Coforge and Persistent in the latter.

At 10.31 a.m., the Nifty IT index was up 0.8 percent at 28,224.25 points with LTIM and TCS trading the highest, up 1.7 percent and 1.2 percent, at Rs 4,680.00 and Rs 3,163.50 respectively.

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