IT stocks shrug concerns over Accenture's weak demand outlook, gain 1-2%

The Nifty IT index has rallied over 9 percent in the past month.

Global information technology firm Accenture's forecast of a weaker-than-expected growth in the February quarter failed to hinder sentiment for Indian IT stocks as investors shrugged concerns over a weak demand outlook, lifting these stocks higher on December 20.

Major information technology stocks LTIMindtree, Persistent Systems, Infosys, Tech Mahindra, TCS, L&T Technology, Wipro, Mphasis and Coforge rose 1-3 percent, lifting the Nifty IT index 1.3 percent higher.

However, analysts continue to remain cautious on the overall IT services sector, anticipating weakness in demand to extend well into the first half of FY25.

Adding fuel to the fire was global IT firm Accenture's weak growth outlook and a cautious commentary. Accenture's revenue for the November quarter was up a percent on year at $16 billion, though in line with its guided range of (-2)-2 percent growth, but still the lowest in 13 quarters.

The IT services firm follows a September-August financial year.

Weak guidance suggests no recovery in sight

Accenture reiterated its current growth guidance of -2 to 2 percent on year for the February quarter, which, according to Jefferies, is weak and highlights no near-term recovery. The consensus had estimated a 2.8 percent growth guidance for the February quarter.

Accenture also said its clients continue to prioritise spending on cost optimisation initiatives given the persistent macroeconomic uncertainties and hence, demand for smaller projects (with quick revenue transition) remains muted.

According to the firm, the operating environment remained the same in the past couple of quarters and it isn't expecting a meaningful change in 2024, with smaller deals likely to stay muted.

Longer road to recovery for Indian IT

Morgan Stanley sees negatives from Accenture's weak commentary and growth guidance to more than offset the positives for Indian IT stocks in the near term.

"Share prices of IT stocks have surged over the past week, with more of a macro trade playing out, ignoring near-term fundamentals. We see limited scope for revenue upgrades for India IT peers in the near term given a challenging macro environment on discretionary spending continuing as highlighted in Accenture management's commentary," the brokerage firm said in its report.

The firm also expects overall sentiment to be negative for India IT stocks, however, given that the market is looking through near-term concerns, a deep correction was unlikely.

Nomura said discretionary demand for Indian IT companies is unlikely to recover meaningfully in the remaining quarters of FY24 and the early part of FY25. Accordingly, the brokerage chose to maintain a cautious stance on the sector.

Reiterating the consensus views, Jefferies also said that Accenture's broad-based slowdown across verticals and weak earnings for the September-November also suggests a weak near-term outlook for Indian IT.

"Meanwhile, revenue decline in North America and the communication vertical along with rising challenges in the UK have negative readthroughs for Tech Mahindra, LTIMindtree and Coforge," Jefferies said.

Even though the Nifty IT index has rallied over 9 percent in the past month in hopes of an improvement in the macro environment, Accenture's results do not indicate a recovery is in sight, Jefferies said.

Also Read | Accenture forecasts Q2 revenue below estimates on IT spending weakness

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