IT Sector Outlook: IT sector giant Accenture has reported excellent quarterly results. Accenture has upped its growth guidance for FY22 from 25.5 per cent to 26.5 per cent. Whereas, in the last quarter, the company had kept the growth guidance at 24-26 per cent. At present, despite the current volatility, increasing growth guidance, and stable margin outlook, it is clear that there is strong demand in the industry. Brokerage houses have said that this is also a very positive sign for the domestic IT industry. Brokerage houses have expressed confidence in stocks like Infosys, HCL, and TCS.
Accenture Q3 Revenue Beats Street Estimates
Accenture beat Street expectations to clock a revenue of $16.16 billion in the quarter ended May 2022 (Q3). The number, buoyed by cloud and digital transformation, was an increase of 22 per cent over the $13.26 billion reported for the same quarter a year earlier. The double-digit growth rate augurs well for the Indian IT services industry.
Accenture follows a September-August financial year. Third-quarter represented the period from March-May 2022.
Accenture Increases Its Revenue Guidance
Though the company upped its annual revenue guidance, it expects a negative foreign exchange impact on its results to the tune of 4.5 per cent. Accenture also said that it was expecting full-year revenue to be in the range of 25.5 per cent to 26.5 per cent.
Unexciting 4QFY22 Guidance To Add to Macro Concerns
Brokerage house Motilal Oswal said in its note: “While ACN revised its FY22 guidance up by 100bp (at the midpoint), it guided at 20-24 per cent YoY CC growth in 4Q, down from 27 per cent in 3QFY22. The upper end of its guidance was lower than consensus estimates, which is likely to add to concerns about the impact of a deteriorating macro-economic environment in the US and Europe.”
Rise in Attrition Levels
“Accenture saw attrition rise sequentially in Q3 and management indicated that the uptick was seasonal and the bulk of it was driven by India. The management indicated a conducive environment for price increases, but price increases continue to lag wage inflation. Robust demand and steady decision-making alleviate any concerns over near-term growth; however, elevated attrition and volatility in foreign exchange pose challenges to earnings,” Emkay said.
Among tier 1 names, the brokerage likes Infosys, HCL Tech, Wipro, Tech Mahindra and TCS.
“Accenture has yet again delivered higher-than-expected revenue growth despite a harsher currency headwind of 5 per cent than the expectation of 4 per cent. The management raised revenue growth guidance for a third consecutive quarter despite the increase in currency headwind from 3 per cent to 4.5 per cent for FY22. Bookings were strong too, with a book to bill of more than 1x. Accenture’s strong performance and solid commentary supports our thesis of a robust tech upcycle,” Edelwiss said.
The brokerage said that the outsourcing growth remains high and bookings also remain strong, which bodes well for Indian IT services companies, as it showed its preference for HCL, Infosys and TCS among largecaps and Coforge NSE, LTI and Mindtree among midcaps. The brokerage prefers Zensar, Birlasoft and Firstsource, among smallcaps.
Nomura India said cross-currency could be a material headwind to the reported growth of Indian IT companies in FY23F. Dollar strength against European currencies is likely to negate the positive impact on margins from the rupee depreciation against the dollar.
Supply-Side Issues Persist
“The strong results of Accenture Inc. have alleviated the market’s fear of growth slowdown in IT companies. The management commentary has been positive and highlights that the robust demand trajectory is still intact. This is positive for Indian IT companies as there was an expectation of subdued future growth due to the possibility of a hard landing post the severe rate hikes by central banks globally leading to a deterioration of purchasing power of businesses and curtailment of IT spending. However, a supply-side issue like employee attrition and wage inflation persists. We are positive about IT companies from a longer-term perspective and the current correction provides a good entry point,” said Punit Patni, equity research analyst, Swastika Investmart Ltd.
Brighter Days for India IT Sector
However, global brokerage house CLSA is seeing good signs for the Indian IT industry. The brokerage says that like Accenture, domestic IT companies can also show demand strength in the June quarter. The focus of investors is on margin management. The brokerage says that the near-term outlook for the IT sector is strong and companies like Infosys, TCS and HCL can outperform. Their shares can also show strength.
Motilal Oswal said that the demand environment remains supportive, and the weakening macro environment has not yet started impacting growth in the sector. “While supply-side challenges remain a point of concern, with elevated attrition and lower headcount addition, ACN’s margin guidance implies a stable margin performance in FY23. We maintain our positive stance on the sector as we expect sustained growth with a stable margin. INFO, HCLT, and TCS remain our preferred picks within the Tier I IT space,” the note mentioned.
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