Accenture Q2: Demand weakness priced-in by Indian IT stocks, say analysts

IT stocks today: On the bourses, the Nifty IT index dropped 2.7 per cent in the intraday trade on the National Stock Exchange (NSE), but trimmed losses to quote 0.17 per cent down at 10:20 AM

IT stocks today, Accenture Q2 results: Despite Accenture's cautious demand outlook for information technology (IT) services, the medium-term outlook for Indian IT may not be as bad as feared, analysts said on Friday.

 

This, they believe, is due to Indian IT companies’ minimal exposure to projects related to the US Government – a key concern raised by Accenture. That apart, deterioration in near-term discretionary spends, too, is priced-in the share prices of IT companies, limiting steep downside, they added.

 

"While macro risks have increased vs Q3FY25-end, we believe that the absence of exposure to US federal government contracts puts Indian IT companies in a better situation compared to Accenture," said analysts at Nomura, betting on Infosys and Coforge. 

 

 

On the bourses, the Nifty IT index dropped 2.7 per cent in the intraday trade on the National Stock Exchange (NSE), but trimmed losses to quote 0.17 per cent down at 10:20 AM. All but three index constituents were back in the green, led by Mphasis (up 2.7 per cent), Coforge, LTTS, and Persistent Systems. By comparison, the Nifty50 index was up 70 points (0.3 per cent) at that time.

 

Accenture India houses over 40 per cent of the company's global workforce, and Indian IT companies look at Accenture’s trends to assess global demand. It follows a September-August financial year.

 

Accenture Q2: Revenue guidance revised

During Q2FY25, Accenture narrowed its FY25 revenue growth guidance to 5 per cent to 7 per cent in constant currency (CC) terms from 4 per cent to 7 per cent earlier. The FY25 Ebit margin guidance, too, was revised marginally to 15.6-15.7 per cent from 15.6-15.8 per cent earlier.

 

The revision, Accenture said, comes from potential deterioration in discretionary spends at the lower end due to the rising macro and geopolitical uncertainty. Besides, the company anticipates potential negative impact to its US federal business under Donald Trump government’s goal of managing the government more efficiently. Fed business accounted for 8 per cent of the overall revenue and 16 per cent of the US revenue in FY24.

 

Overall, Accenture posted an 8.5 per cent year-on-year (Y-o-Y) rise in Q2FY25 revenue at $16.66 billion in CC terms. Consulting revenue was up 6 per cent Y-o-Y, while Managed Services revenue grew 11 per cent Y-o-Y. Among verticals, the broad-based growth was led by Financial Services (up 11 per cent Y-o-Y), and Healthcare and Public Services (10 per cent Y-o-Y). Adjusted Ebit margin slipped 20 basis points Y-o-Y to 13.5 per cent, even as reported Ebit margin was up 60 bps Y-o-Y. 

 

Among geographies, North America grew 11 per cent Y-o-Y, EMEA grew 8 per cent Y-o-Y, and Asia Pacific 1 per cent Y-o-Y.

 

Overall book-to-bill was around 1.3x with Outsourcing/Consulting book-to-bill at 1.2x/1.3x in Q2FY25. Gen AI bookings were $1.4 billion in Q2FY25, up from $1.2 billion in Q1FY25.

 

"Despite decent growth during the quarter, uncertainty in federal spending remains a concern. Indian IT companies have low single-digit exposure to federal spending, which may keep stocks volatile in the near-term. Additionally, the risk of clients pausing spending due to rising global uncertainties add to the headwinds. However, strong growth in Managed Services and bookings bode well for Indian IT and should help offset some of the macro concerns," Antique Stock Broking said.

 

Near-term risks elevated

That said, while analysts stay positive on the sector in the medium-to-long-term, the near-term uncertainty -- the US rate cuts appearing less imminent, and geopolitical/tariff risks introducing new uncertainties for enterprises in the US and Europe -- is likely to remain an overhang on the stocks, they said. 

 

"Accenture's deal booking remained a tad soft, which raises concerns on growth momentum sustainability, especially during periods of elevated uncertainty. At the beginning of CY25, we were optimistic that the ensuing macro improvement could lead to improvement in tech spending and growth acceleration. However, elevated macro uncertainties could put consensus estimates of Indian IT companies at risk," said analysts at Emkay Global Financial Services.

 

It added: We believe valuation has priced-in growth moderation compared with earlier expectations for CY25, but material slowdown/recession risk persists. It prefers Infosys, TCS, HCL Tech, Tech M, LTIMindtree, and Wipro.