Accenture's outsourcing guidance bodes well for big Indian IT cos: Analysts

Analysts underscored that Accenture's August quarter (Q4FY22) results reflected softening of demand for IT services, and thus remain 'cautious' on the sector

The July-September quarter of financial year 2022-23 may see large Indian IT companies cornering a bigger chunk of outsourcing deals, if Accenture’s Q4 FY22 results are anything to go by.

Analysts said that the Dublin-based consultancy company’s ‘double-digit’ guidance for outsourcing revenue bodes well for players like Infosys, HCL Tech, and Tata Consultancy Services (TCS).

“Accenture’s strong growth in Q4 of FY22 bodes well for the growth of Indian IT firms in Q2. Healthy order bookings in outsourcing are good at the outset; however, large deals driven by cost takeouts potentially reflect rising caution among clients, and do not bode well for smaller IT firms,” said Jefferies.

Edelweiss Securities, too, concurred that Accenture’s solid performance and commentary supports the long-term outlook for large Indian IT services companies like HCL Technologies, Wipro, and Tech Mahindra.

From the mid-and small-sized segment, the brokerage expects Coforge, Larsen and Toubro Infotech, Mindtree, Zensar Technologies, Birlasoft, and Firstsource Solutions to benefit.

On Thursday, Accenture guided revenue growth of 8-11 per cent in local currency for FY23, including 2.5 per cent inorganic contribution.

The revenue growth guidance, however, is a moderate 2-5 per cent in dollar terms, assuming cross-currency (forex) dent of 6 per cent.

The company has guided for 10-30-basis points (bps) increase in EBIT (earnings before interest, and tax) margin, and has guided for earnings per share (EPS) growth of 4-7 per cent. Accenture follows the July-August financial year.

“We fear that the Indian Tier-2 set would suffer more because of vendor consolidation under the pressured profit picture for customers, a less diversified revenue mix and a larger exposure to non-global clientele, who are more vulnerable to macro challenges,” said analysts at Nirmal Bang Institutional Equities.

They suggest investors use the likely H1 of FY23 strength to pare positions if overweight, especially in the expensive Tier-2 set.

Sector outlook weak

Analysts underscored that Accenture’s June-August quarter results reflected softening of demand for IT services, and thus remain ‘cautious’ on the sector.

“Accenture noted that certain industries are facing higher impact from inflation and are re-prioritising spends towards cost initiatives. Thus, we believe consensus revenue growth estimates for financial year 2023-24 (FY24) will likely see downward revisions for Indian IT companies,” analysts at Nomura said.

For FY23, Nomura added that higher depreciation in European currencies will likely negate the benefit of rupee’s depreciation against the dollar for Indian IT companies.

Meanwhile, Accenture’s consulting segment growth has been decelerating for the last two quarters, implying lesser demand for discretionary spends. Analysts said demand for discretionary services could be lower for Indian IT services companies as well.

“Weak and below-consensus revenue guidance by Accenture for Q1 of FY23, and the whole of FY23 point towards slowing demand. Also, slowing pace of hiring for the last two quarters (despite elevated attrition) implies weak demand visibility. We expect a similar slowdown in hiring for Indian IT services,” said ICICI Securities.

The brokerage maintains an underweight stance on the IT sector.

Accenture reported an attrition rate of 20 per cent during Q4 of FY22, which was one of the highest ever. The management mentioned that wage inflation is expected to continue in FY23. And, it expects tight labour market conditions to persist in the near term. Given this backdrop, analysts expect margin pressures to continue for IT services.

Nirmal Bang Institutional Equities said that some worrying trends for Accenture in Q4 are low net hiring despite record order inflow, supply chain disruption, declining GDP estimates and high wage inflation, among others.