scorecardresearchTop brokerages remain mixed on IT sector post Accenture's Q1FY23 numbers

Top brokerages remain mixed on IT sector post Accenture's Q1FY23 numbers

Updated: 20 Dec 2022, 08:24 AM IST
TL;DR.
Accenture's revenue stood at $15.7 billion, up 15 percent year-on-year (YoY) in CC terms and 5.2 percent YoY in dollar terms.
Accenture's lower deal bokings. have raised concerns.

Accenture's lower deal bokings. have raised concerns.

Accenture's Q1 numbers had mixed signals for the Indian IT firms.

Accenture Plc's healthy revenue and earnings were even better than estimates but its forecast for the second-quarter sales underscored the pressure on the demand side due to macroeconomic uncertainty.

As brokerage firm Motilal Oswal Financial Services pointed out, Accenture's revenue stood at $15.7 billion, up 15 percent year-on-year (YoY) in CC terms and 5.2 percent YoY in dollar terms. It was 100 bps ahead of the management’s guidance of 14 percent CC and Bloomberg consensus estimates in Q1FY23.

But the point of focus was its lower deal bookings.

The company reported lower deal bookings at $16.2 billion this quarter (book-to-bill ratio of 1 time), down 4 percent YoY (the lowest in five quarters), said Motilal Oswal.

Brokerages have mixed views on the IT sector

Brokerages see some positives and negatives in Accenture's numbers and guidance.

Kotak Institutional Equities went to the extent of saying that Accenture's results reinforced what was known earlier—the impact of a deteriorating macro is feeding its way into discretionary spending, while cost take-out focus will lead to an uptick in managed services.

Kotak expects moderation in growth for its coverage universe even as stocks in our coverage universe have corrected in the past six months due to risks to margins, a slowdown in growth rates, and an increase in the interest rate environment.

Kotak believes risks to margins have already played out and it expects margins to increase in the subsequent year.

"We believe that slowdown in growth rates is also baked into stock prices. We expect growth rates of 5-8 percent in FY2024E, down from 11-16 percent in FY2023E for tier-1. A deeper recession has implications on multiples and is not fully priced in. On risk-reward framework, we find Infosys, HCL Tech and Mphasis attractive and are our top picks," said Kotak.

On the other hand, Motilal Oswal underscored that Accenture's management indicated a healthy pipeline and strong spending in the areas of digital and cloud. It expects managed services to outgrow S&C (strategy & consulting), which is positive for Indian IT. Though bookings were lower in Q1FY23, the company hinted at strong bookings in Q2FY23.

Motilal Oswal is of the view that a sharp 700bp improvement in attrition and Accenture’s margin guidance implies an easing supply scenario and strong margin performance for the Indian IT industry.

"We continue to 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 within the tier-1 IT space," said Motilal Oswal.

Brokerage firm ICICI Securities believes from Q3FY23, management commentary of Indian IT services will start to weaken and the impact on revenue growth will be visible in Q1 and Q2 of FY24.

"We believe the Indian IT Services should always be accumulated when US macro is at its maximum pain and the next six-nine months (or further de-rating of 10-15 percent in index) will give investors good opportunity to accumulate preferred bets," said ICICI Securities.

"We have Cyient as our top pick in our coverage universe followed by HCL Tech as they offer a good risk-reward ratio. For other stocks in our coverage universe we will wait for better entry levels," said ICICI Securities.

Brokerage Emkay Global pointed out that amid macro uncertainties, clients are turning cautious, leading to a slower pace of spending, delay in decision-making, and pause in smaller deals. This would constrain the near-term growth trajectory. Demand has clearly moderated due to macro weakness, but remains resilient; this should alleviate any concerns of a sharp fall in demand, said the brokerage firm.

Emkay prefers Wipro, Tech Mahindra, Infosys, HCL Tech and TCS in the tier-1 space, and Mphasis, Birlasoft, Firstsource Solutions, and Persistent Systems among mid-caps.

Nuvama Wealth Management (formerly Edelweiss Securities) observed while Accenture continued facing challenges in consulting vertical, the outsourcing vertical continues to report strong growth. It also saw a decline in attrition, which reflects the easing of the supply-side situation.

"Overall, the results are a positive read-across for Indian IT services companies. The strong performance and optimistic demand commentary further provide strong visibility for the sector. 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 Wealth.

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: 20 Dec 2022, 08:24 AM IST