IT stocks unfazed by Accenture's narrow FY24 guidance, Street cheers Q3 deal pickup

So far this year, shares of Tech Mahindra and Wipro have surged up to 9 percent, while Infosys and TCS have slipped by up to 1 percent

Indian IT stocks were unfazed on June 21, with TCS, Infosys, HCL Technologies, Wipro, LTIMindtree rising over 1 percent each even after Accenture narrowed its revenue guidance for FY24 due to macroeconomic uncertainties. Analysts see Accenture's Q3 results as slightly positive for domestic IT stocks, thanks to a rise in small deals and a rebound in consulting growth.

So far this year, shares of Tech Mahindra and Wipro have surged up to 9 percent, while Infosys and TCS have slipped by up to 1 percent. In comparison, the benchmark Nifty 50 index has surged by 8 percent during the same period.

Morgan Stanley highlighted some positive data points from Accenture's Q3 results, including the return to growth in strategy and consulting, and an increase in smaller deals. However, they remain cautious about the return of discretionary spending, noting it is still 'elusive.'

ALSO READ: Accenture lowers revenue forecast again as tough macro economy weighs

Nomura, too, retained a cautious stance on the revival of discretionary spending but is optimistic about order book growth driven by large projects. Accenture's new order bookings rose by 22 percent YoY in Q3, driven by 23 large deals worth over $100 million each. Bookings in consulting and managed services increased by 4 percent and 2 percent, respectively.

"While revenue growth for large-caps should improve in FY25F (+2.9 percent YoY vs FY24F (+1.3 percent YoY), we expect it to be driven by cost take-out deals. We have a 'buy' rating on Tech Mahindra in largecaps and Coforge, Birlasoft, eClerx in midcaps. Conversely, we have a 'reduce' rating on TCS, Wipro, LTIMindtree, and Mphasis," Nomura added.

Similarly, analysts at Kotak Institutional Equities expect some elation in Indian IT stocks. "Strong bookings numbers and acceleration in growth rates from a decline to a positive aided by inorganic growth may spur some excitement given the buoyancy of the sector on any positive indications on demand," they said.

Accenture's Q3 revenue was $16.47 billion, down from $16.56 billion a year ago, with flat operating margins YoY. The company, which follows a September-August financial year, tightened its full-year revenue guidance to 1.5-2.5 percent from the previous 1-3 percent. Given that a significant portion of Accenture's workforce is based in India, its results are often seen as indicative of broader trends in the Indian IT sector.

Going ahead, Accenture expects revenue growth from the consulting business to turn positive in Q4FY24 after five consecutive quarters of a YoY decline. Accenture noted that, while the industry’s long-term technology spending trends remain intact, client cautiousness due to macro uncertainties is weighing on tech spending in the near-term.

ALSO READ: Accenture’s tepid outlook implies more pain for Indian IT even in FY25

Having said that, the company's artificial intelligence (GenAI) portfolio continued to grow, with bookings reaching $900 million for the quarter, contributing to a total of $2 billion in bookings — the largest in the IT services industry. Accenture and TCS are the only two big IT companies that have so far declared revenue from this nascent technology.

Nomura analysts believe that this rise in GenAI signalled enterprises need to further invest in cloud adoption and data standardisation to harness its true potential. "It views GenAI as any other new technology wave and hence, would adopt previously proven playbook of being an early mover in investing in the technology and advising clients, and adopting the tech," they noted.

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