Accenture's retained FY23 guidance hints slowdown for IT firms: Analysts

For FY23, Accenture has maintained its 8-11 per cent growth guidance. This is reportedly the first time since FY17 that the company has not upgraded its full-year guidance after the first quarter

Despite a revenue beat in the November quarter (Q1FY23), Accenture Plc’s results have nudged analysts to reaffirm their cautious stance on the Indian IT companies as they foresee moderation in revenue growth going ahead.

Accenture’s revenue in the reporting quarter grew 15 per cent year-on-year (YoY) in constant currency (CC) terms to $15.7 billion, higher than analysts' average estimate of $15.58 billion. This was also above the company’s upper-end guidance of 10-14 per cent YoY CC growth.

But the company has pegged the next quarter's (Q2FY23) revenue between $15.20 billion to $15.75 billion. The mid-point of the guidance is below analysts' estimate of $15.61 billion, according to Refinitiv.

For FY23, the IT major has maintained its 8-11 per cent growth guidance. This is reportedly the first time since FY17 that the company has not upgraded its full-year guidance after the first quarter.

The unchanged guidance when compared to a 26 per cent growth of FY22 is indicative of softening of demand for IT services, analysts at Nomura said in a note. 

“Accenture noted that certain industries are facing higher impact from macroeconomic uncertainties and are re-prioritizing spending towards cost initiatives. We maintain our cautious stance on the demand outlook and think consensus revenue growth estimates for FY24E may see downward revisions,"' they said. 

Accenture’s deal bookings dropped 3 per cent YoY in dollar terms to $16.2 billion split equally between consulting bookings that fell 14 per cent YoY and outsourcing bookings that grew 10% YoY, reflecting changing demand patterns. The company noted that smaller deals are becoming lesser as clients are prioritising large cost-take-out projects.

Rising caution among clients as they shift their focus on cost optimization suggests sharp moderation in growth for IT services in FY24, according to Jefferies. Though client focus towards cost transformation deals positions larger IT firms more favourably than mid/small-sized firms, it said.   

Accenture’s outsourcing segment revenues, which remain more relevant for Indian IT players, moderated in Q1FY23 to 20 per cent YoY from 23 per cent in the last three quarters.

This, experts add, hints at moderation in Indian IT services growth as well amid macro demand headwinds. The company, meanwhile, has guided for strong bookings in 2QFY23 expecting outsourcing to fare better than consulting, which has been trailing for the past few quarters. 

"Overall, while incremental negative commentary in consulting is of concern, we believe Accenture's result did little to clear the demand picture; a scenario we believe could persist through FY24. We remain conservative, " said analysts at JM Financial. 

On the other hand, Accenture reported a sharp 700 bps quarterly drop in attrition to 13 per cent for the quarter, which lends support to the margin outlook for the IT sector.

With a falling growth outlook, tech layoffs and weaker funding for Indian tech startups, Nomura expects attrition to fall significantly for Indian IT companies over the next few quarters providing tailwinds to margins.

Against this backdrop, analysts suggest investors stay selective in the space and pick stocks that are less vulnerable to a global slowdown. 

"IT stocks should always be accumulated when US macro is at its maximum pain and the next 6-9 months (or further de-rating of 10-15 per cent in IT index) will give investors a good opportunity to accumulate preferred bets," said ICICI Securities in a note.