IT shares sink as Accenture cuts guidance; TCS, Infosys and HCLTech fall

FY25 outlook muted for the sector, say analysts

Shares of IT companies plummeted by up to 6 per cent on the National Stock Exchange (NSE) in Friday’s intraday trade, a day after Accenture slashed its full-year revenue growth guidance from 2-5 per cent to 1-3 per cent and dealt a blow to hopes of a recovery in the sector in 2024-25.

The Nifty IT index, the only sectoral index to suffer a loss on Friday, closed more than 2 per cent down, contrasting with a 0.4 per cent rise in the Nifty50 index. The IT index had slipped nearly 4 per cent in intraday trade. 
 

Accenture reported Q2FY24 revenue of $15.8 billion, a figure that remained flat on-year (Y-o-Y) in constant currency (CC), and down 2.6 per cent sequentially. This was in line with company guidance and Bloomberg consensus estimate. However, its weak Q3 revenue growth guidance and lowered FY24 guidance both missed Bloomberg consensus expectations. The NYSE-listed company follows a September-August financial year.
 

Analysts and industry players had been hopeful of an uptick in growth in 2024-25. However, with Accenture’s revenue growth guidance cut and soft growth in managed services, it appears that prospective clients are still holding back on spending.
 

Accenture’s revenue guidance now includes an inorganic contribution, expected to be 3%. It has made a total investment of $2.9 billion in acquiring 23 companies in the first half of its financial year.
 

“We believe discretionary demand is unlikely to recover meaningfully in H1FY25F for India IT, and maintain our cautious stance. While revenue growth for largecaps should improve in FY25F (+6 per cent Y-o-Y) versus FY24F (+1.5 per cent Y-o-Y), we expect it to be driven by cost take-out deals,” said a report by Nomura.

Accenture's management pointed out that clients are still grappling with an uncertain macro-environment due to economic, geopolitical, and industry-specific conditions. 

“…And in response, we are seeing them thoughtfully prioritise larger transformations, building out their digital core to partnering, to improve productivity, to free-up more investment capacity to focus on growth, and other initiatives with near-term return on investment (RoI),” said Julie Sweet, chair and CEO, Accenture during an analyst call after the results.

Accenture's results also showed that while GenAI deals are being awarded, they are coming at the cost of other deals. The company announced that it booked over $600 million deals in GenAI, taking the total to $1.1 billion in the first half of its financial year.

“Strong pick-up in GenAI bookings has not meant better discretionary spending. Cuts in other parts of discretionary spending have been used to fund generative AI experimentation budget,” said a report by Kawaljeet Saluja, Sathishkumar S, and Vamshi Krishna of Kotak Institutional Equities.

Other factors that continue to show softness, which will impact the Indian IT sector, include growth from regions. For instance, North America was flat sequentially and EMEA (Europe, Middle East, and Africa) was down 2 per cent. Over the past two-three quarters, growth at the top IT firms has been driven by Europe. The fourth quarter of FY24 would reveal how this trend has panned out

Accenture reported a fall of 6 per cent in financial services for the quarter. BFSI (banking, financial services and insurance), the largest vertical for all the top IT players, has continued to be slow for Indian firms over the past two quarters. This ongoing slowdown in the tech industry paints a somber picture for the future.

“We expect large IT services companies to start FY25E with cautious guidance. Growth will vary considerably across companies on the basis of mega-deal ramp-ups, vertical exposure and discretionary spending. We expect a modest cut in expectations of larger companies where estimates are rational and sharper cuts in estimates of mid-tier companies,” said the Kotak report.

While ramp-up of large deal wins should aid growth in FY25 for select Indian companies, “persisting weakness in discretionary spending puts our/consensus estimate of high single-digit growth for large caps at risk,” according to analysts at Emkay Global Financial Services.

 Accenture also reported a drop in its total headcount at the end of the second quarter of its FY24. For Q2, the headcount drop was 723 sequentially. Accenture’s total headcount was 742,318 at the end of the quarter. The company also saw its attrition rise to 13 per cent for the second quarter from the 11 per cent in the preceding quarter.