Finace And Stock

Will IT firms deliver strong growth in Q2? Accenture results offer cues

NEW DELHI: Accenture, whose performance and revenue guidance is typically seen as a barometer for the performance of Indian technology companies, clocked a strong 21 per cent jump in revenues for the August quarter and its revenue guidance of 12-15 per cent growth for FY22 was impressive, suggesting a similar strong momentum for domestic IT companies in the September quarter.

The quarterly numbers, however, may bring some disappointment on the deal win and attrition fronts, Accenture numbers show. Analysts largely expect IT stocks to sustain the current high PE multiples going ahead. They like stocks such as Infosys, HCL Tech and Tech Mahindra among the Tier I names.

JM Financial expects a strong September quarter for Indian IT firms in terms of revenue growth. It said it would await commentary on margins, as talent costs go up. Accenture guided for a 10-30 basis points improvement in operating margins in FY22 over FY21’s 15.1 per cent.

“We believe Accenture’s strong Q4 operational performance in the outsourcing vertical sets the tone for Indian IT service companies’ good show in the coming earnings season,” said Edelweiss Securities.

Accenture follows September-August as the financial year. It has guided for revenue growth of 18-22 per cent for the quarter ending November, and 12-15 per cent for FY22 (September 2021-August 2022). The management commentary on demand reiterated the ‘compressed transformation’ and ‘once-in-a-lifetime business re-platforming’ narratives that the IT firm has held forth for the past few quarters.

But outsourcing bookings for Accenture were weak at $7.1 billion for the quarter, representing a 5.6 per cent YoY decline. It was 2.6 per cent lower than the average of the last four quarters.

This may cause some concern, said Kotak Institutional Equities, which expects muted total contract value (TCV) numbers from the India-listed IT firms.

“We expect growth for our coverage universe to be driven by increased velocity of short-cycle programs. The underlying demand dynamics, however, remains strong. Hence a muted TCV for one quarter is not a concern,” Kotak said.

Besides, Accenture’s attrition picked up to 19 per cent on annualised quarterly basis from 17 per cent in the May quarter and 7 per cent in the August quarter of 2020.

“We expect a similar trend for our coverage universe. The fact is that the talent crunch is severe and will take a few quarters to settle down,” Kotak said, which has retained its constructive view on the Tier-1 pack led by Infosys, TCS, HCL Tech and Tech Mahindra.

Nirmal Bang Institutional Equities said it would be seen whether Accenture’s FY22 guidance goes through multiple upward revisions, as seen in the past.

The brokerage said Accenture’s commentary reflects customers’ intent to embrace digital transformation to generate business value faster.

“Early digital adopters among its clients want to invest to maintain or increase their lead vis-à-vis peers, while the digital laggards want to leapfrog. All data points indicate that while demand is healthy, it has likely peaked and that the Indian IT industry should see a slow down in FY23 into double-digit growth rate, slower than FY22,” Nirmal Bang said.

This brokerage said the 20 per cent growth for Accenture in FY21 order flow and the commentary on the pipeline indicate that the low-teen growth expectations that the Dalal Street has built in for the Indian IT players for FY23 are realistic and could help sustain the high PE multiples that they are currently trading at. It may, however, not help much in expanding PE multiples further, it said.

“Accenture’s robust Q4 performance and strong FY22 revenue growth guidance of 12-15 per cent in local currency reflect strong demand environment. Outsourcing order booking moderated a bit in Q4 but remained healthy. A broad-based demand uptick and healthy order booking in the outsourcing business augur well for Indian IT peers. Though attrition remains an issue across the industry, clients have become more amenable to price increases, especially for digital projects as they recognise industry-wide supply-side constraints, which should support margins,” Emkay Global said.

The Nifty IT index has risen 30 per cent in the last three months, compared with a 14 per cent rise in benchmark Nifty50.

Emkay said a strong demand environment, sustained acceleration in revenue growth and robust order booking should support the high valuations. It prefers Infosys, HCL Tech and TechM among the tier-1 names and Persistent Systems and Birlasoft among tier-II names.

Meanwhile, Accenture’s earnings highlighted two additional aspects. The first is the strong net hiring of nearly 55,500 employees by the company in the August quarter, which was up 9.7 per cent sequentially. The highest quarterly additions ever continued to reinforce the trend of strong offshore-led hiring.

Secondly, Accenture was confident of improving margins in FY22 even when there are concerns around supply-side pressures from Indian IT in the recent times. JM Financial said it is positive for HCL Tech and Infosys.


Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Adblock Detected

Please Disable the Adblocker