Accenture's Q3 performance brightens outlook for Indian IT sector; Infosys, HCL Tech, TCS among top picks

Global IT consulting firm Accenture posted better-than-expected third-quarter revenue on June 24, boosting hopes that the IT sector will continue to see strong demand and orders.

The company's revenue rose to $13.3 billion in the quarter ended May 31 from $11 billion a year earlier, news agency Reuters reported. Analysts on average had estimated revenues of $12.8 billion, according to IBES data from Refinitiv.

Accenture's quarterly numbers and guidance have further brightened the outlook for the IT sector, as most brokerages have reaffirmed their positive view on the sector.

Global brokerage firm CLSA said strong demand outlook by Accenture has a positive read-through for Indian peers.

"Accenture's Q3 revenue growth at 21 percent year-on-year (YoY) was ahead of 14.2-17.8 percent guidance. Accenture raised FY21 revenue growth guidance to 10-11 percent from 6.5-8.5 percent. The recent stock consolidation provides a good base for an up move. Infosys, HCL Tech and TCS are our preferred stock picks," CLSA said.

Motilal Oswal Financial Services said Accenture's performance and comments reinforce its stance that demand trends, order book, and deal velocity remain robust for the sector.

"Strong growth and higher book-to-bill ratio in the outsourcing business (1.2 times) resonates well for Indian IT. However, increased attrition remains a point of concern for the industry as higher employee cost

would put pressure on profitability," Motilal said.

"We maintain our positive stance on the sector as we expect sustained growth rates for a longer period of time. Infosys and HCL Technologies remain our preferred picks within Tier-1 IT," said the brokerage firm.

Also read: Accenture’s attrition back to pre-pandemic level, promotes 1.17 lakh employees in a quarter

JM Financial Institutional Securities underscored that Accenture’s strong Q3FY21 results and the significant rise in FY21 revenue guidance for the year confirm strong near-term momentum that signals a strong Q1FY22 for the offshore techs.

"We find encouragement in the qualitative commentary. Accenture suggests sustained demand for compressed transformation and also hopes to see modest expansion in operating margins in the next fiscal. This bodes well on growth for Indian techs, confirming the strong underlying strength and also the likelihood to protect margins even after higher supply-side costs aided by growth leverage and potentially

some pricing benefit," JM Financial said.

The brokerage said there is a  greater likelihood of companies beating street expectations in the upcoming results season, which could drive slight revenue/earnings upgrades.

"Our preferred picks in the sector remain HCL Tech and Infosys among the Tier-1 techs and Persistent Systems and Coforge among the tier-2 techs," the brokerage firm said.

Accenture's strong operational performance in its outsourcing vertical sets the tone for the upcoming earnings season of the Indian IT service companies, Edelweiss Securities said.

"We reiterate that a robust tech upcycle or 'Techolution' is in its starting phase and may continue for four–five years," Edelweiss said.

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