Accenture results signal positive cues for Indian IT firms

Robust guidance backed by growth across segments and better pricing mean higher rupee earnings amidst a strong dollar

Accenture’s latest results indicate that the IT sector could be a hedge against a falling trend in the broader market. The US-listed IT major declared strong results and guidance for the future. This should also hold true for other IT companies.

The US Fed’s latest monetary policy review has shaken financial markets. The FOMC has accelerated the pace of taper of its monthly bond-buying programme. It has also indicated it will hike the USD Federal Funds policy rates at least three times in calendar 2022, by increments of 25 basis points each time. The tightening of liquidity and the likely impact of USD strengthening has led to sell offs across many financial markets.

The FPIs have been expecting this since the FOMC announced a taper in October. Their net attitude to Emerging Markets has been negative. India has seen net FPI selling of over Rs 32,000 crore since October. In the past seven days, the Nifty has fallen by 5.6 per cent mainly due to the heavy selling by the FPIs.

However, the IT Index has returned net zero in the past 30 days, and there is a chance that it could be negative beta and rise, if the broad market continues to fall. The logic is that, apart from the strong guidance from Accenture, which should hold good for other IT firms, the stronger USD would translate into better rupee earnings.

Accenture revenues rose 27 per cent YoY to $14.97 billion, well above its guidance of maximum $14.35bn. It claimed strong demand across industries, service verticals and geographic markets. It also said order booking was strong. It posted double-digit in Cloud, Industry and Security strategic priorities, and Interactive. All three service lines - Strategy & Consulting, Technology and Operations reported robust growth. New bookings hit a high of $16.8 billion (30 per cent up YoY). The operating margin expanded 20 bps YoY to 16.3 per cent. Annualised attrition eased to 17 per cent from 19 per cent in the previous quarter. The company added a net 50,057 employees (about 8 per cent QoQ). The guidance was that this is an extraordinary demand environment as companies continue to invest in digital transformation.

Accenture’s guidance for 2021-22 has a strong upwards trend with a $3.5 billion increase over previous guidance expected in the next three quarters and it’s spread across verticals and regions. This should be similar for Indian IT peers. Attrition is one issue – this remains higher across the industry. But margin expansion is also likely since Accenture says it has been able to negotiate hikes. The Accenture management pointed out that only 30 per cent of companies have completed a migration to Cloud, which implies ample opportunities.

The Nifty IT Index has consistent outperformance returning 1 per cent (3 months), 27 per cent (six months) and 58 per cent (12 months) versus the Nifty which is minus 2 per cent, 9 per cent and 26 per cent, respectively, in the same time frames. The IT index looks like a good hedge if the next quarter or six months is rocky for the broader market and for businesses that don’t have USD-earnings.