As Reuters reported: “Accenture fanned concerns about dwindling IT spending on Thursday with a quarterly Revenue forecast that was below Wall Street estimates, sending its shares down more than 5 per cent.”
“North America – Accenture’s biggest market – also performed poorly in the March to May period, with revenue growth slowing there to a near three-year low of about 2 per cent,” the report added.
North America is a key market for Indian IT firms too. As US Federal Reserve Chairman Jerome Powell said on Wednesday that inflation remains elevated and more rate hikes are possible, suffering for the IT companies may continue in the short term.
Deciphering the cues from Accenture’s Q3 numbers for Indian IT firms, brokerage firm Motilal Oswal Financial Services pointed out that even though Accenture reported revenue growth of 5 per cent YoY CC in Q3, ahead of expectations it has lowered the upper end of its FY23 revenue growth guidance band by 100 bps to 8-9 per cent year-on-year (YoY) constant currency (CC), which is a negative signal for the Indian IT companies.
“Accenture management highlighted the impact on the demand environment from adverse macro, delays in small and discretionary deals, and a dip in deal pricing in a few segments, all of which indicate a drag on near-term growth for our IT coverage. We expect a negative near-term impact from the Accenture earnings commentary,” said Motilal Oswal.
Kotak Institutional Equities said Accenture’s Q3FY23 earnings showed weak discretionary spending continues with growth led entirely by managed services.
Kotak said generating returns in India-listed companies, after a sharp stock price rally post-Q4FY23 results, will be a challenge.
“CMT (communications, media and tech) stands out in terms of weak performance. Tech Mahindra with 39 per cent exposure to the segment is the most vulnerable. Financial services growth has also slowed down, especially in North America. These two verticals are the biggest drag on growth,” said Kotak.
“North America growth has slowed down to 2 per cent with a lot of it flowing through CMT and financial services. Further, results indicate that the nature of demand is shifting from discretionary-led to a mix of cost take-out and discretionary. Core modernization is receiving a larger focus as well,” Kotak pointed out.
On a similar line, brokerage firm ICICI Securities believes there could be a downward revision of FY24 earnings estimates for Indian IT companies.
“Accenture called out weaknesses in communication media and technology vertical and strategy and consulting practice. We continue to have a ‘reduce’ rating on Tech Mahindra (40 per cent revenue from communication) and Wipro (derives nearly 15 per cent revenue from consulting),” ICICI Securities said.
“The impact of generative AI (artificial intelligence) on IT services is still evolving. RoIs (return on Investments) are yet to be established for generative AI use cases. The managed services business is doing better than consulting in terms of both revenue growth and order bookings for Accenture and implies resilient demand for operations and managed services work for IT services companies,” said ICICI Securities.
Brokerage firm JM Financial that Accenture’s result for Indian IT hints that a soft first half is already anticipated for India IT.
“Given that Accenture’s outlook is only till August, it offers little incremental read-through for Indian IT. However, potential deterioration in smaller discretionary projects, CMT vertical and North America suggest demand has not bottomed. These have negative implications for LTIMindtree, Persistent Systems, Tech Mahindra and Infosys,” said JM Financial.
“While relatively resilient managed services are positive from Indian IT’s perspective, Accenture’s sheer scale makes it difficult to extrapolate it to Indian IT players, barring probably TCS. Also, HCL Tech, owing to its higher RTB exposure, could be relatively better placed in the current environment,” said JM Financial.
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