Accenture’s results don’t offer much relief for Indian IT’s Q2 numbers

Accenture estimated revenue growth of 2 to 5 percent in FY24, and CEO Julie Sweet said the company is not assuming an improvement in the discretionary spending environment or the macro.

Accenture’s mixed set of earnings numbers and its subdued guidance for the next year sent the American Depository Receipts of Infosys and Wipro tumbling by as much as 3 percent in overnight US trading. The results of the Dublin-based IT company, which has a large percentage of its workforce in India, may indicate how Indian rivals such as Infosys and Tata Consultancy Service are likely to shape up.

As analysts expected, the results don’t offer much cause for cheer for the Indian IT sector, and the gloom is expected to continue in Q2 as well — discretionary spending is yet to return, there is broad-based weakness in the communications, media and technology (CMT) vertical, and clients are signing fewer smaller deals as they prioritise larger programmes and focus on cost optimisation.

Accenture estimated revenue growth of 2 to 5 percent in FY24, and CEO Julie Sweet said the company is not assuming an improvement in the discretionary spending environment or the macro. According to a note by Kotak Institutional Equities, this is the “second-lowest among the beginning of year guidance in the past 16 years.”

Everest Group CEO Peter Bendor-Samuel told Moneycontrol there is a heavy component of weak market sentiment playing in Accenture's forward-looking commentary.

“Accenture is seeing clients being worried about global macro while considering spending decisions… Indian firms are experiencing the same market pressures of significantly diminished discretionary spend and reluctance to commit to new significant initiatives,” he said. “This will affect all of the IT Indian industry. Those firms with strong cost-cutting offerings such as TCS, HCL, Cognizant and Infosys will have aspects to their business which will partially offset these negative headwinds, but even these firms cannot fully escape the negative macro environment.”

Near-term concerns

Accenture’s bookings declined 10 percent and its revenue growth of 4 percent in its last quarter was driven by managed services, while consulting declined 2 percent year-on-year.

Analysts at Kotak said in their note that Accenture’s results and guidance reiterated “continued weakness in discretionary spending even as enterprises are willing to invest in core modernisation and cloud migration.”

Due to the weakness in the CMT vertical and the decline in consulting, it expects Tech Mahindra and Wipro to be impacted more.

“Caution on the macro is leading to clients looking for cost savings to fund transformation programmes. Cost take-out programmes are the dominant source of demand for Indian IT. The opportunity is not democratic and better addressed by select companies,” Kotak said.

Motilal Oswal said Accenture’s performance last quarter and the outlook for the next one add to concerns over the near-term demand environment.

“Additionally, 4Q deal booking declined 3% QoQ vs. company guidance of flat growth, implying lower visibility on demand in the current environment… In our view, ACN’s commentary implies near-term weakness for Indian IT companies,” it said in a note.

Jefferies said in a note that the sharp moderation in deal booking in consulting and managed services suggests rising scrutiny on IT spends. The limited growth in consulting bookings/revenue could be seen negatively for Wipro and a muted outlook for North America and the CMT vertical offers negative read-throughs for Tech Mahindra and LTIMindtree.

Pickup in 2HFY24?

While expectations initially were that Indian IT would pick up in the second half of the financial year, there is concern now that growth will be subdued. Jefferies said the tepid growth guidance and a sharp decline in the managed services bookings of Accenture in Q4 suggest that demand recovery is likely to be more gradual than expected.

JM Financial said Accenture’s guidance “pushes out hopes of a second-half recovery (Y/E March) for India IT Services players.”

“Besides, a modest implied growth rate through 2HFY24 for ACN risks India IT Services players’ FY25 revenue growth estimates as well. This, we believe, is an incremental negative… Continued weakness in North America’s BFSI and Hi-tech, though not surprising, indicates demand has not bottomed yet. ACN's commentary that weaker macro is taking its toll on the pace of spending of even the larger programmes could mean that large deal ramp-ups could take even longer, further impacting revenue growth,” it said.

In its note, Kotak said that a macro improvement is difficult to predict.

“We expect the current scenario to continue in 2HFY24 and some uptick in discretionary spending in FY2025 especially in BFSI and hi-tech verticals,” it said.

For Indian IT, while there have been many large-deal announcements in the past quarter, Everest’s Bendor-Samuel said there is significant indecision, creating delays and difficulties in getting them across the line.

“Contributing to this indecision is the prospect of recession next year. As the direction of the US and EU economies becomes clearer, we expect the pace of deal closing to accelerate. This increase in deal velocity is likely to occur regardless of the direction the economy takes,” he said.

Thanks to this, he said deal velocity is likely to increase in the fourth quarter and accelerate further next year.

“However, the nature of these large deals will shift, depending on the strength of the economy. With a recession, we expect to see an increase in large deals driven by portfolio consolidation and other cost-saving strategies. With an improving economy, we expect to see more large transformational and modernisation deals. The lower comparables this year will also make market acceleration easier in 24. Hence, we expect a somewhat better 24 followed by a stronger 25,” he added.