Accenture hikes FY15 revenue growth guidance to 8-10%

This mitigates concerns on demand environment

Revenue and earnings growth of Indian software services companies have been hit by cross-currency movements. Management commentary on the demand environment has also been mixed. As a result, the Street has cut revenue and earnings estimates for FY16. In contrast, Accenture raised its revenue growth forecast to 8-10 per cent for FY15 from the earlier five-eight per cent (in local currency) while reporting its second quarter numbers. According to analysts, Accenture’s numbers suggest the demand environment remains strong, as  growth was driven by outsourcing and consulting segments.

With Accenture continuing to clock robust growth in consulting and outsourcing, the Street might be willing to review its stance on IT if valuations are attractive. Over the past few months, revenues and earnings of Indian companies have been hit by cross-currency moves, leading to downgrades in earnings and revenue estimates for FY16. With the dollar strengthening and euro declining, the receivables of Indian companies have taken a hit.

Though Indian companies remain cautious, Accenture has increased its revenue forecast for the second time in FY15 (its financial year ends in August), driven largely by the strong order flows and double-digit growth in consulting and outsourcing. Accenture’s revenue growth (in local currency) jumped to 12 per cent over a year in the second quarter from 10 per cent in the first quarter. Order bookings remained strong at $9.4 billion. Kotak Institutional Equities notes “The read-through of ACN’s (Accenture) results, tricky as it may be, is a positive for Indian IT based on strong growth in the consulting business.”

Accenture's outsourcing revenues grew 13 per cent year-on-year in local currency, while consulting revenues were up 11 per cent. Rumit Duggar of Religare Institutional Equities believes that while Accenture's numbers are a positive, they do not suggest meaningful gains for Indian IT, given divergent portfolios. “Moderate valuations and positive H1 (first half) seasonality keep us upbeat on India IT despite near-term weakness.”

Unlike Accenture, the commentary on Indian companies remains subdued, as there is no certainty how the dollar strength will impact IT spends of clients. Accenture's performance and change in guidance might mitigate concerns around demand environment, but it does not make the sector attractive. Although the demand environment is healthy, cross-currency risks would limit earnings per share (EPS) growth at top-5, explains IIFL Institutional Equities. The brokerage is of the opinion that lacklustre EPS growth and premium valuations would limit upsides for TCS and Infosys.