Accenture Q3 results: Demand slowdown in Indian IT bottoming, say analysts

What Accenture results mean for Indian IT: Analysts believe FY25 Street estimates for Indian IT companies have been adequately rationalised, implying little downgrade risk from current levels

Takeaways for Indian IT stocks and Accenture Q3 results: Demand weakness may be bottoming out for the Indian information technology (IT) companies, analysts said on Friday.

The optimism stems from Dublin-based Accenture's third quarter results for financial year 2023-24 (Q3FY24), which, analysts noted, showed green shoots of recovery.

Accenture follows the September to August financial year.

According to analysts, two key takeaways from Accenture's commentary stand out for Indian IT. First, consulting to return to growth in Q4; and second, bookings-to-revenue conversion gradually improving.

"Indian IT Services companies have been reeling under the low deals-to-revenue conversion, and any signs of that improving is positive," said Vibhor Singhal of Nuvama Equities in a co-authored note with Nikhil Choudhary and Yukti Khemani.

On Thursday, Accenture's Q3 revenue came in at $16.5 billion, up 1.4 per cent year-on-year (Y-o-Y) in constant currency (CC). While revenue from Outsourcing was up 4 per cent CC Y-o-Y, it fell 1 per cent CC Y-o-Y for the Consulting segment.

Deal bookings came at $21.1 billion, with Consulting bookings at $9.3 billion and Outsourcing at $11.8 billion, versus Bloomberg's estimate of $17.7 billion. The overall book-to-bill was around 1.3x with Outsourcing and Consulting book-to-bill at 1.5x and 1.1x, respectively, in Q3FY24.

Within this, Accenture also booked deals worth over $900 million in the Generative AI segment in Q3FY24 and reached $2 billion for the fiscal year-to-date. Besides, the company saw significant demand in areas like cloud modernisation, data and AI, platforms, and security. Adjusted Ebit margin came in-line with Street estimates at 16.4 per cent, up 10 basis points Y-o-Y.

“The strong Outsourcing bookings with a book-to-bill of 1.5x bodes well for the Indian IT as it has also been announcing strong deal flows in the past few months which should be reflected in Q1FY25 deal bookings,” said a report by Antique Stock Broking.

On the bourses, the Nifty IT index jumped 2.6 per cent in the intraday trade to hit a high of 35,875. Individually, Persistent Systems advanced 4.5 per cent, LTI Mindtree 3.6 per cent, Coforge 3.5 per cent, and Infosys 2.5 per cent.

Others like HCL Tech, Tech M, Tata Consultancy Services, Wipro, Mphasis, and LTTS were up in the range of 1.6 per cent to 2.45 per cent at 9:45 AM. By comparison, the Nifty50 was holding above the 23,600-mark (up 0.19 per cent).

While clients continued to limit discretionary spending and delayed decision-making, analysts believe maintenance of the mid-point of its revenue guidance by Accenture points to a stable demand environment.

“We expect the start of the interest rate-cut cycle to act as a signaling trigger for clients, to gain confidence on the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending. We expect the IT stocks’ earnings downgrade to bottom out in H1FY25, if current expectations on interest rate cut materialise,” said analysts at Emkay Global, who prefer Infosys, HCL Tech, TCS, and LTI Mindtree in large-caps; and Cyient, Birlasoft, and Firstsource Solutions within mid-caps.

FY24 revenue guidance cut

That said, Accenture has narrowed its FY24 revenue guidance to 1.5–2.5 per cent from 1–3 per cent as it anticipates a 70-bp forex headwind.

Accenture noted that, while the industry’s long-term technology spending trends remain intact, client cautiousness due to macro uncertainties is weighing on tech spending in the near-term.

“We believe discretionary demand is unlikely to recover meaningfully in FY25 for India IT, and therefore, maintain our cautious stance. While revenue growth for large-caps should improve in FY25 (expected to rise 2.9 per cent Y-o-Y vs 1.3 per cent Y-o-Y growth in FY24), we expect it to be driven by cost take-out deals,” said a note by Nomura.

The brokerage has a ‘Buy’ rating on Tech Mahindra in large-caps; and Coforge, Birlasoft and eClerx in mid-caps. It has a ‘Reduce’ rating on TCS, Wipro, LTIMindtree, L&T Technology Services, and Mphasis.