What accenture Q1 results indicate for Indian IT firms

When the leader sneezes, its cohort catches a cold. That’s become apparent after Accenture Plc’s latest quarterly results.

In the September-November quarter, the revenue of the world’s largest IT services firm rose 15% year-on-year in constant currency terms to $15.7 billion as growth in the outsourcing business outpaced that of the consulting segment. The company had guided for 10%–14% revenue growth in the three-month period.

That Accenture has still maintained its revenue growth guidance of 8%–11% for the fiscal ending August 2023 indicates demand moderation for Indian IT firms, Nomura said in a research report. “We remain concerned about the demand outlook for Indian IT services and expect 470 basis points lower revenue growth at 8% in FY24F vs FY23F for our coverage universe.”

According to Jefferies, there are three key takeaways for Indian IT from Accenture’s results:

• Rising caution among clients with a focus on cost optimisation suggests a sharp moderation in growth for IT services in FY24.
• A cooling of the job market, lower attrition, and more prudent hiring are likely to lower support margins, but wage inflation remains high.
• Increased client focus on large cost optimisation deals and a slowdown in smaller deals position larger IT firms more favourably than mid- or small-sized firms.

Changing Demand Pattern
The macro uncertainties, stemming from a hawkish central bank in the U.S. and a drawn-out war in Europe, have had a bearing on the spending power. Smaller deals have reduced to a trickle as clients focus on core projects.

The changing demand pattern reflects in Accenture’s order book as well. The company’s booking growth slowed the most in five quarters, to 6% year-on-year in the first quarter. The consulting order book fell 14% year-on-year, while the outsourcing order book grew 10%. The book-to-bill ratio declined to 1.03 times in Q1 as compared to 1.19 times in Q4 FY22.

“Owing to macro-uncertainty, the company, Accenture, has seen the pausing of smaller deals and delays in decision-making, and the pace of spending across the board by verticals and geographies,” Morgan Stanley said in its research report. “This is more pronounced in strategy and consulting work, which has a higher volume of smaller deals.”

Glimmer Of Hope
Still, there are some positives for Indian IT to draw from Accenture’s post-earnings commentary.

First, the company has maintained its growth guidance despite increased macroeconomic uncertainty, Morgan Stanley said in its report. The demand for managed services, where revenue flow-through takes longer than short-cycle consulting, is holding up. Attrition rates are improving, as is contract profitability, lending much-needed support to margins.

“Investors in Indian IT stocks are incrementally looking to get confirmation of the FY24 revenue growth outlook. With Accenture’s current results, we don’t see that outlook changing yet,” Morgan Stanley said in its report. “However, worsening of demand commentary highlights that risks to revenues are more to the downside than to the upside.” Bloomberg