What does US major Accenture's strong growth outlook say about Indian IT industry?

The company follows September to August for its fiscal.

During Q4 FY20 results announcement, the company said it expects the FY21 revenue to be in the range of 2-5 percent in the wake of COVID-19. Its fourth-quarter revenues declined 2 percent to $10.8 billion as its clients reduced existing work and deferred decisions on newer projects.

Julie Sweet, CEO, Accenture, said in the earnings call on December 17: “This quarter we saw building momentum with a return to low single digit growth from a low single digit decline in H2 of FY'20 as clients focus on creating new experiences in the new environment.”

So what led to the change in outlook in 90 days? 

KC McClure, CFO, Accenture, explained during the earnings call that the company saw broad-based growth in all verticals across geographies and industries, and demand for cloud services fared better than expected. After muted growth in North America and 5 percent decline in Europe, the company posted 4 percent growth in Americas and a decline of 1 percent in Europe. 

After weak sales the IT major reported in Q4 due to the pandemic, the business improved in Q1 due to significant improvement in smaller deals. The company also expects to see the benefit from the transformational deals the company signed last year and an uptick in consulting business, which had declined due to COVID-19.

What does it mean for Indian IT?

The strong deal wins and outlook for FY21 indicate the healthy demand for coming quarters by the Indian IT services firms as customers continue to invest in digital.

Brokerage firm ICICI Securities in a note said: “This is a decent lead indicator of a residual ‘comeback’ by Indian IT in the impending earnings season.”

According to analysts, it is a boost to the global IT services industry with pent-up demand coming back after delays due to COVID-19. The last couple of months have seen a surge in demand for tech talent in contract staffing firms as projects that were delayed are coming back and strong deal wins in the areas of digital.

As Infosys Chairman Nandan Nilekani pointed out during a recent media event, as clients fast-track their digital transformation journey from few years to weeks, there is a tremendous appetite for investments, which is driving growth.

Growth drivers

Indeed the growth has come on the back of customers accelerating their digital transformation journey, as they look to reduce cost, and pivot to remote working environment amid the pandemic. “For the pre-COVID digital leaders, they are racing to widen the gap, and for the digital laggards, they are racing to leapfrog,” Sweet pointed out.

So to help them in the digital transformation journey, these clients are consolidating their vendors and partnering with them.

This has reflected in the company’s increasing revenues from cloud and outsourcing. Cloud revenue stood at $12 billion in FY20, growing at a low single digit. For Q1, the space saw strong double-digit growth but did not disclose revenues.

The company stopped declaring revenues from 'The New' that includes cloud, digital and security services starting this quarter. Sweet, during the firm’s Q4 results in September, said that the company will no longer measure 'The New' separately since it has become core to its business accounting for about 70 percent of its business.

TCS stopped declaring digital as a metric for the same reason starting October-to-December quarter 2019. Infosys, HCL Tech and Wipro share revenues from digital, though what constitutes digital changes from one firm to another.

Another factor is outsourcing. Revenues from outsourcing have grown for Accenture. Unlike Indian IT services, Accenture has a strong consulting business as well as outsourcing.  On the back of COVID-19, the company’s outsourcing witnessed significant growth compared to consulting. It grew 9 percent to $5.4 billion in Q1 FY21 compared to a decline of 0.7 percent in consulting.

Even in the total $12.9 million new deals signed, outsourcing accounted for about $6.3 billion, up from $4.3 in Q1 2020.

Brokerage firm Emkay said in a note: “A broad-based demand recovery and sustained healthy growth momentum in revenue/order booking of the outsourcing business augur well for Indian IT peers.”

The outlook and trends are in line with the commentary IT majors and industry experts had shared in recent times. Salil Parekh, CEO, Infosys, at the recent Infosys Media Day 2020 event, said that many of the large deals are new digital transformation programmes as customers rethink their existing business models.

But…

Though the deal wins and demand outlook is encouraging, this will not mean the growth would be more than pre-COVID-19 levels. For instance, Accenture’s outlook of 4-6 percent for FY21 is still less than the 6-8 percent full-year outlook it gave last year. Demand would be more or less what it was before COVID-19.

Yugal Joshi, Vice President, Everest Group, an IT consultancy firm, said, “In general it is a good indication that there may be some 'revenge spending' or pent-up demand but making it a trend will not be correct.”

Accenture has a higher exposure to healthcare vertical, which is one of the key growth drivers for the firm; Indian IT firms' exposure is less. Revenues from healthcare account for about $2.2 billion (18 percent of the overall revenue), 11 percent y-o-y growth, the highest across its verticals.

For Indian IT firms, healthcare though significant is not as big as Accenture. For Wipro, it accounts for 13.7 percent of the revenues. For Infosys health and life sciences accounts for about 7 percent of the revenues and for TCS, it is 9.8 percent. For HCL Tech, the segment grew from 12 percent in 2019 to 14 percent currently.