Accenture results leave IT investors between hope and despair

Accenture’s revenue for the quarter ending August (Q4FY23), deal bookings and FY24 revenue growth guidance point to a long recovery path for the Indian information technology (IT) sector. Accenture follows a September-August financial year. The global IT company’s performance is seen as a precursor to the earnings outlook of Indian IT companies. Accenture’s latest results show revenue visibility is still bleak.

In constant currency terms, Accenture’s year-on-year revenue growth has narrowed for the sixth consecutive quarter to 4%, which is the mid-point of its 2-6% guidance. This growth was driven by its managed services/outsourcing business, where it competes with tier-1 Indian IT companies, indicating market share gains for Accenture. The consulting business was weak, which could be a dampener for Wipro Ltd given the latter’s exposure to this area.

Weak discretionary spending and slower decision-making by clients amid macro uncertainties continue to weigh on demand for IT services. In this backdrop, Accenture’s deal bookings fell 10% in Q4, dragged by the managed services segment. There is greater caution among clients for shorter deals and this is now percolating down to larger deals as well, the management said.

For tier-2 Indian IT companies, which are more dependent on short-cycle deals, this is bad news, especially given their rich valuation multiples. Secondly, this also means that large deal ramp ups could take longer, further weighing on the sector’s FY25 revenue growth trajectory—an incremental negative.

Overall, management commentary pointed to a tougher-than-anticipated macro environment in FY23. Accenture’s FY24 revenue growth guidance of 2-5% was modest considering that it delivered 8% growth in FY23. While Accenture’s FY24 guidance does not factor any improvement or deterioration in macro and discretionary spending environment, it expects a pick up in demand towards the back end of the year.

In short, those rooting for a quick turnaround in earnings of Indian IT companies are in for a disappointment. Accenture’s FY24 organic growth guidance (0-3%; lowest in a decade) coincides with H2FY24/H1FY25, when rebound for Indian IT was anticipated by the street to play out, said an Ambit Capital report dated 29 September.

“Weak Q1FY24 (-2 to +2% year-on-year in constant currency) guidance suggests H2 recovery hopes for Indian IT might be aggressive,” it added. In that case, the Nifty IT index which has risen by 11% so far in 2023 on expectations of recovery, may be poised for a correction.