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Accenture's revenue guidance for Q1 points to concerns for Indian IT firms

Analysts said that margin pressures are expected to continue in Indian IT, and they may see a slowdown in growth momentum.

September 23, 2022 / 11:00 AM IST

For Indian IT companies, Accenture's revenue estimates for the first quarter of the upcoming fiscal may be a cause for concern, according to analysts. Accenture’s results, which come before those of India's major IT companies, typically represent expectations for those companies' own results. A sizable number of the company’s employees also work in India.

Accenture, which announced its fourth quarter results on September 22  (it follows a September-August financial year), forecast Q1 revenue in the range of $15.2-15.75 billion, which is less than the estimate of $16.07 billion and includes a -8.5 percent impact on a year-over-year basis due to a stronger dollar.

Accenture's revenue guidance for the first quarter of the next fiscal year, which is lower than expected, could be a sign of concern about the slowing of the world's largest economies, whether in North America or Europe, according to Omkar Tanksale, Research Analyst at Axis Securities.

“For India, I believe the results will be in line with expectations and growth momentum is likely to continue. However, it is likely that margins will continue to remain under pressure for some time. But, going ahead, IT might expect some spending cuts and might face some slowdown in growth momentum,” he said.

During the company's earnings call, Accenture Chief Executive Officer (CEO) Julie Sweet stated that despite the economic slowdown, the company continues to see really strong demand for its services.

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“The most recent estimate for IT Services continues to show the growth for our industry will be about 5 percent. Anywhere in our range, it will show us continuing to take share,” she said.

The current macro environment affects different industries differently, Sweet said, adding that those who are “really tied to the supply chain disruption and inflation continue to focus on cost.”

Commenting on the focus of clients, Accenture said it is recommending that leadership teams prioritise “where they can get good time to value, making sure that they are doing things that are material, not having 1,000 different pilots as opposed to actually getting to scale”, Sweet said.

Sweet cautioned that most of their clients adhere to the calendar year and set their budgets in January, at which point they will have a better idea of their visibility for the second half of the fiscal.

Accenture's attrition rate remained high at 20%, the same as in the previous quarter. Sweet stated that the company expects the labour market to remain tight as technology skills are in high demand by both companies and their own competitors.

It added nearly 11,000 people during the quarter, marking the second consecutive quarter of low headcount addition — figures closer to pre-pandemic levels.

“We're expecting to have a continued tight labour market, and we continue to expect us to really excel because despite that market. Even this last year, we added 100,000 people. The fact that there have been some layoffs in certain markets isn't really going to change much,” Sweet said.

Accenture's Chief Financial Officer, KC McClure, expects wage inflation to continue.

“It's across all industries and across the globe. And for us, it's going to vary by geography by scale. And we will navigate that like we did this past year with a focus on pricing, which we all know can lag compensation a bit,” she said.

Concerns abound for Indian IT

The results indicate a strong performance from Indian IT in Q2FY23 because they operate in a similar business environment, according to Mitul Shah, Head of Research at Reliance Securities. He did warn, however, that lower guidance and margin pressures would result in weaker commentary and more challenges for the IT sector in the future.

According to an ICICI Securities note authored by Aniket Pande and Aditi Patil, Accenture's slowing consulting bookings growth implies lower demand for discretionary spends, and demand for discretionary services is expected to be low in Indian IT as well.

The note also said that the slowing pace of hiring despite elevated attrition implies weak demand visibility, and a similar slowdown in hiring can be expected in Indian IT. With Accenture’s comments on wage inflation and a tight labour market, ICICI Securities said margin pressures are expected to continue for Indian IT services.
Haripriya Suresh
first published: Sep 23, 2022 10:46 am
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