Accenture Q4FY20 earnings: Five key takeaways for the Indian IT companies

Most information technology (IT) stocks were trading firm on Friday, a day after Accenture, a global behemoth in the consulting and IT services, announced its fourth-quarter results for the fiscal 2020 (Q4FY20). While the company missed estimates for fourth-quarter sales and projected current-quarter revenue below Wall Street expectations, strong traction in the outsourcing business, strong order bookings, and encouraging management commentary were the key positives from the industry's standpoint.

Accenture reported revenues of $10.8 billion, down 2 per cent year-on-year (YoY) and 1 per cent YoY in constant currency terms after including the 2 per cent impact from the decline in reimbursable travel costs due to Covid-19 crisis.

Here's how leading brokerages have interpreted the numbers and extrapolated them to the Indian IT sector.

Stressed verticals

Analysts at Nomura note that Accenture's weakness is restricted to stressed verticals such as retail, manufacturing, travel, and energy, which contributed nearly 20 per cent of revenues for the company at the end of FY20.

"Momentum is intact in seven verticals that contributed nearly 50 per cent of Accenture’s revenues as of 4QFY20 and the traction is strong in healthcare. India IT has a limited presence in healthcare and stressed verticals such as retail, manufacturing, and travel contributed nearly 30-35 per cent of revenues for Tier-1 India IT as of June 2020 quarter data," the brokerage said. 

New bookings

New bookings grew 9 per cent YoY to $14 billion, their second-highest ever, and came as a positive surprise, note analysts at Jefferies. New bookings in consulting and outsourcing increased by 7 per cent and 10 per cent to $6.5 billion and $7.5 billion, respectively. Its book-to-bill ratio of 1.3x was the highest in 25 quarters. Management highlighted that nearly 70 per cent of bookings were in digital, cloud, and security related services. "Accenture’s sharp rebound in new bookings reflects accelerated spends on digital transformation which in turn will be a key medium-term growth driver and  Tier-I Indian IT firms are favorably positioned to leverage these growth opportunities," analysts at Jefferies said.

FY21 outlook

The company has guided for revenue growth of 2–5 per cent YoY in constant currency (CC) terms in FY21 (Sep’20–Aug’21) and margin expansion of 10–30 basis points (bps), which is encouraging, say analysts at Motilal Oswal Financial Services (MOFSL). "H2FY21 (Mar–Sep’21) is expected to see high single-digit to low double-digit growth. This is a positive for Indian IT companies and further solidifies our expectation of a better FY22 outlook," the brokerage said in a note dated September 24.

Cloud business key focus area

The US-based firm indicated that Covid-19 has accelerated the adoption of Cloud and expects penetration in public Cloud to increase from 20 per cent currently to 80 per cent over the next five years at enterprises. This is positive for Indian IT companies as the shift to Cloud, according to Nomura, will build a foundation for digital transformation and deflates costs that can be reinvested by enterprises to fund their digital transformation initiatives.

High cash conversion

Accenture reported free cash flow (FCF) / net income (NI) of nearly 150 per cent as the Days Sales Outstanding (DSO) improved by 6 days QoQ to 35 days. Indian IT companies have been following a disciplined collections process too, and have reported similar improvements recently. DSO should continue to be largely stable for them going forward.