Accenture show raises hopes for IT sector

Strong forecast and management commentary on budgets are key positives

Accenture’s strong show in the February quarter (Q2) had two takeaways for Indian information technology (IT) companies. One, demand is stable, with clients' IT budgets holding steady. Two, the BFSI (banking, financial services, and insurance) segment is growing well, especially in the digital space. This is significant, given that Cognizant and Mindtree had flagged weakness in their BFSI businesses earlier this year.

On the contrary, Accenture, Tata Consultancy Services (TCS), and Infosys have held on to their positive views on the sector. Companies giving cautious commentary could be facing client-specific problems, say analysts.

A key reason for Accenture's strong show is it was among the early movers in adapting to trends in the clients' discretionary spends and digital investments. Indian IT companies like TCS have stepped up digital focus, and analysts seem convinced of their strategy. This, along with undemanding valuations, is the reason most analysts are positive on the Indian IT sector.

Valuations of the top four Indian IT companies — TCS, Infosys, Wipro, and HCL Technologies — have fallen from 15-20 times the FY17 estimated earnings a few months ago to 14-18 times currently. TCS used to trade at 20 times and is now at 18, while Infosys has seen an uptick from 16.5 to 18. The valuations have moved in line with changes in earnings growth estimates.

"We expect a slightly soft but steady 10-11 per cent growth for Indian IT in FY17, with potential pick-up as Indian IT’s participation in digital increases. One-two per cent lower growth in FY17 is well-accepted and captured in the new valuation range," says Kawaljeet Saluja of Kotak Institutional Equities. Infosys and Tech Mahindra are his top picks. Though the S&P BSE IT index ended the day half a per cent down, it outperformed the S&P BSE Sensex, down 1.5 per cent on Monday.

For the quarter, Accenture's constant-currency revenues grew 12 per cent and were three per cent ahead of Street expectations. Its full-year revenue forecast was raised. The firm expects to clock constant-currency revenue growth of eight-10 per cent in FY16 versus six-nine per cent earlier. It also raised its FY16 EPS (earnings per share) forecast to $5.21-5.32 from $5.09-5.24 earlier.