IT stocks rally post encouraging Q3 results by Accenture; Infosys jumps 7%

Information technology (IT) companies' shares rallied on Friday after Accenture came out with better-than-expected quarterly numbers. The company reported an adjusted third-quarter profit of $1.90 a share, which beat the $1.85 average estimate of 22 analysts surveyed by Bloomberg.

In the management commentary, Accenture said it expects a decline in IT budgets due to the weak economic growth outlook. However, spends on digital transformation will increase, offset by lesser spend on running operations. Accenture will transform run operations providing cost savings, which will be invested back into digital transformation. 

Reacting to the development, most IT stocks traded in the green. The S&P BSE Information Technology index ended over 5 per cent higher at 15,125 levels. Infosys, Mindtree, Mastek, and NIIT Tech were among the top gainers on the index - rising up to 7 per cent. 

In comparison, the benchmark S&P BSE Sensex was ruling 0.73 per cent higher at 35,096.32 levels. 

Prabhudas Lilladher notes that Accenture reported robust Q3FY20 with revenues closer to the upper end of guidance, impressive growth in total bookings, and confidence of strong bookings in 4QFY20E.

However, the key point, it said, was to note that the company did not face significant cancellations or pricing pressure.  Work from Home (WFH) transition was smooth and had a very little revenue impact. Accenture ramped up WFH to 95 per cent of the workforce in April and May.

The brokerage further said that Accenture's digital revenues stand at 70 per cent of their revenues against 35-40 per cent for Indian IT peers. Hence, "there is limited read through but Indian IT stocks will be reacting positively to results/commentary in trade," it said in a sector update issued on Friday. 

The brokerage remains bullish on Infosys and TCS.

Emkay Global Financial Services, too, sees a limited read-through for Indian techs in general from Accenture’s results. It sees downside risks to growth for Indian techs in the near term, with preference for Tier I companies over Tier II.

Analysts at Motilal Oswal Financial Services (MOFSL), on the other hand, note that a stronger-than-expected results/commentary of Accenture sets an encouraging tone for the impending earnings season for Indian IT.

"We see Accenture’s results and commentary as a mere re-iteration of the adaptability and resilience of the business model. This should partly alleviate the concerns of Indian IT investors around the potential disruption to operations, business continuity and new deal wins," they wrote in a report dated June 25.

It continues to remain bullish on Infosys, TCS, HCL Tech among Tier I companies and Larsen & Toubro Infotech and Mindtree from the midcap space.