Accenture's Q2 result raises red flags for Indian IT

IT consulting major Accenture recently announced its second quarter results for fiscal 2022, beating Wall Street estimates.
 
The Dublin-based company reported revenue income of 15 billion dollars, registering a growth of 24 per cent year-on-year in dollar terms and 28 per cent in local currency. It also saw record order inflow at 19.6 billion dollars, rising 26 per cent year-on-year in local currency. 

However, what surprised the markets was Accenture’s sharp upward revision in revenue guidance. The company now expects revenue growth in the range of 24-26% in local currency for FY22, up from 19-22% pegged last quarter. It had pegged revenue growth in the range of 12-15% at the start of the fiscal.
 
Analysts say Accenture’s strong revenue growth led by broad-based demand driven by accelerated cloud and digital transformation is a positive for Indian IT. The increase in FY22 growth guidance, despite uncertainty from the Russia-Ukraine conflict, further pins hopes of robust order pipeline.
 
Motilal Oswal Financial Services highlights that Accenture’s positive commentary indicates a healthy pipeline and strong spends in areas of digital, cloud, Web 3.0 and security. Only 30% of workload is on cloud and, thus, acceleration of cloud adoption will open further opportunities for IT companies and provide a sustained demand environment.

It also said...given Accenture’s tendency of increasing guidance over the quarters, its Indian IT services peers would be closely watched for their commentaries on FY23 as expectations on growth escalate.

That said, not all is well for the Indian IT companies.
According to D-Street mavens, even though Accenture’s numbers look impressive, they highlight pain for its Indian counterparts.

For instance, Accenture has been clocking record order wins in ‘large’ size segment, while Indian IT companies are focusing on mid and small-order sizes.
The company has also seen accelerated market share gains in FY20-FY22 compared to TCS and Infosys and has been talking about three-times industry growth in recent days versus two-times in the past.
 
To be sure, Accenture does benefit from strong capabilities across digital areas in consulting and outsourcing, which are preferred by enterprises undertaking digital transformation programs.

But, this has aided the company in outperforming Tier-1 Indian IT companies. The second red flag for the Indian IT companies comes in terms of margin guidance.
Accenture has lowered FY22 EBIT margin improvement guidance to 10bps for the fiscal, which suggests elevated supply pressures.

Given this, JM Financial says there are potential risks to margins from likely rebound in travel expenses in H1FY23 itself and elevated supply side pressures, exacerbated further by the recent Ukraine crisis.
Ambit Capital expects growth of tier-I IT companies to moderate from 17.7% YoY, in constant currency in FY22, to 11.7% and 8.1% in FY23 and FY24.
 
The third headwind for Indian ITs emerges from outsourcing income, which accounts for a very large part of Accenture’s revenue.
Indian players like TCS, Cognizant Technology Solutions, Infosys, Wipro, HCL Technologies and Tech Mahindra are in direct competition for the same.

Against this backdrop, IT shares pared their gains and ended lower on Monday with the Nifty IT index dipping nearly 2% from the day's high and closing 07% down.
Let’s go to Business Standard’s Avdhut Bagkar to see if these headwinds are showing any downside pressure on technical charts.
 
Net-net, Accenture results present a mixed picture for the Indian IT players with visibility of a sustainable demand but margin pressure and market share headwinds looming large.
On Tuesday, global cues and stock specific action will sway the indices amid lack of domestic events.

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