Accenture's Q2FY23 result has mixed signals for the Indian IT space; here's what top brokerages say

Updated: 25 Mar 2023, 09:31 AM IST

Accenture reported a 9 percent year-on-year (YoY) constant currency (CC) revenue growth in 2QFY23, near the top end of its guided range of 6-10 percent in CC.

The company reported healthy numbers for the second quarter of FY23 on March 23.

Accenture's earnings are often seen as an important indicator of what lies ahead for the Indian IT firm.

Accenture is one of the largest IT services and consulting firms in the world. Its financial performance gives a significant indication of the IT services sector.

The company reported healthy numbers for the second quarter of FY23 on March 23. While it reported record deal bookings, it cut the revenue guidance by 100 bps.

Moreover, it said it will lay off 2.5 percent or 19,000 employees over a period of the next one and half years.

As highlighted by brokerage firm Motilal Oswal Financial Services, Accenture reported a 9 percent year-on-year (YoY) constant currency (CC) revenue growth in 2QFY23, near the top end of its guided range of 6-10 percent in CC.

It reported record deal bookings in the second quarter, which was up 17 percent YoY CC, mainly led by outsourcing at $11.4b (1.5 times book-to-bill, up 31 percent YoY).

However, despite the strong order booking, Accenture trimmed the upper-end of its FY23 revenue growth guidance by 100 bps to 8-10 percent from 8-11 percent, partially due to a 50bp lower contribution from acquisitions, Motilal said.

"This was on account of weaker demand for its consulting business (52 percent of revenues), partially offset by a strong growth outlook in its outsourcing business, which we see as positive for its Indian IT services peers. However, the company’s plan to trim its workforce by 19,000 (2.5 percent of the total workforce) and not to add workforce in 2Q and 3Q raise concerns," Motilal said.

Mixed signals for Indian IT

Picking the hints from Accenture's result, most brokerage firms are positive about the prospects of the Indian IT sector. However, some of them still appear cautious due to the prevailing demand uncertainty.

Brokerage firm Motilal Oswal Financial Services has maintained a positive view on the Indian IT sector as it underscored Accenture delivered record-high bookings during the quarter.

However, the brokerage firm highlighted Accenture announced headcount cuts and indicated muted hiring for 3QFY23, which is negative. But the management commentary indicates consistent demand momentum despite weak macro.

"We maintain our positive stance on the sector as we expect good demand over the medium term and strong margin recovery. TCS, HCL Tech, and Infosys remain our preferred picks in the tier-I IT space," said the brokerage firm.

Nuvama Wealth Management also believes Accenture's Q2FY23 results indicate positive trends for the Indian IT services companies given strong growth and bookings in the Outsourcing business.

"We maintain our positive stance on the sector, and expect a sustainable strong demand environment to drive strong earnings growth for the sector over the next three years," said Nuvama.

Nuvama observed Accenture's Q2FY23 revenue growth and cut in guidance were both better than expectations. Despite macro headwinds, outsourcing is expected to grow in double-digit as demand continues to be resilient since clients continue to invest in tech to improve efficiency and drive transformation, Nuvama said.

On the other hand, brokerage firm JM Financial Institutional Securities warns of extrapolating Accenture's results to Indian IT players.

"Accenture's managed services– a more relevant segment for India IT services’ peers – was resilient with 32 percent year-on-year (YoY) bookings (highest ever) and 16 percent YoY CC revenue growth. One should, however, be wary of extrapolating Accenture's results to Indian IT players as this might reflect the strength of Accenture's scale and its vantage position in advisory-led cost takeout/vendor consolidation scenarios rather than broader demand," said JM Financial.

Emkay Global Financial Services highlighted that Accenture's deal booking remained strong in Q2 driven by large transformational deals.

However, clients are turning cautious amid macro uncertainties, leading to delays in decision-making and pause in smaller deals which could lead to increased volatility in quarterly deal bookings and likely to the narrowing of the growth differential between tier-1 and tier-2 companies, the brokerage firm pointed out.

"Demand has moderated due to weakness in consulting, softness in the flow of smaller deals and slower decision-making amid macro uncertainties; nevertheless, demand remains resilient and should alleviate any concerns of a sharp fall," said Emkay.

"We prefer large caps over mid-caps, considering a shift in the deal mix and relative valuations. Our pecking order is Infosys, Wipro, Tech Mahindra, HCL Tech and TCS in the tier-1 space and Zomato, Firstsource Solutions, eClerx Services, Mphasis, Birlasoft, and Persistent Systems among mid-caps," Emkay said.

Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.

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First Published: 25 Mar 2023, 09:31 AM IST