Accenture’s muted earnings dash hopes of Indian IT’s quick recovery

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IT services provider Accenture’s subdued first quarter performance, cautious demand outlook and one of its weakest revenue growth guidance for the financial 2024 has dashed hopes of an early recovery in the Indian IT sector amid ongoing macroeconomic challenges.

The global IT giant, which has a huge chunk of its employee base in the country, is often considered a bellwether for the Indian IT competitors such as TCS and Infosys.

“Accenture has underperformed mid-point of initial revenue growth guidance five times in the past 17 years… Note that already guidance of 2-5% is among weakest guidance in history, similar or weaker guidance occurred in recession years,” Kotak Institutional Equities said in a report on December 20.

Accenture, which follows a September-August fiscal year, reported 1 percent YoY quarterly growth in revenue at $16 billion. Though the revenue growth was in line with its guided range of -2-2 percent growth, it was the lowest in 13 quarters.

While it retained the 2-5 percent revenue growth guidance, the organic contribution has reduced coupled with discretionary demand remaining weak especially in segments like CMT, BFSI and product business. Analysts at Kotak Institutional Equities called it an “underwhelming development”.

Factoring in these aspects, they don’t expect a quick recovery in demand, as clients continue to be cautious in the near term.

“While rate cuts can reduce macro uncertainty and spark spending in the future, haze around the near term continues. Significant recovery in discretionary spending, at least in 1HCY24, appears a low probability event. We expect 8-9% industry growth in FY2025E,” the analysts said.

The US Federal Reserve’s latest policy review hinted at least three rate cuts in 2024, sparking hopes of businesses spending more on IT.

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

High hopes on large deals, Gen AI

Accenture reported deal wins of more than $100 million from 30 clients this quarter. Large deals are expected to boost growth acceleration in H2FY24.

It also had an industry leading generative AI (GenAI) pipeline worth $450 million in new bookings, compared to $300 million in full year of FY23.

Accenture said it expects clients to move from Gen AI experimentation to more proof of concepts and pilots in 2024. It is also doubling down on skilled workforce in data and AI, increasing to 80,000 from 40,000 in the beginning of the year.

Earlier this year, the company said it would invest $3 billion over the next three years into its data and AI practice. As a part of it, the company launched a generative AI studio in Bengaluru this week.

Kotak analysts, however, threw in a caveat, saying while there is strong Gen AI sales, cloud and discretionary spending has not lifted.

“It is interesting to note that Accenture expects subdued discretionary spending for whole of 2024 despite the seeming break-neck acceleration in Gen AI-related revenue. Clients seem to have repurposed existing discretionary spending toward gen AI experimentation,” they said.

While the definition of Ggen AI sales is not clear, “Indian IT may not able to replicate Accenture’s lead in the space in experimentation phase of the technology given,” the analysts added.

This will be due to low consulting exposure of Indian IT firms and low exposure to CMO stack where generative AI has several use cases.