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Accenture : Deceleration in outsourcing segment, ICICI Securities

Accenture’s overall / outsourcing revenue growth of 1.2% / 1.8% QoQ (USD) was in line with guidance / consensus estimates. Healthcare vertical, which has been a key growth driver over previous 5 quarters (+5.3% CQGR), witnessed revenue decline for the first time since the Covid 19 onset. This was likely driven by moderation in covid-led spend in areas like contact tracing etc. Over L3Y, inorganic contribution in revenue growth guidance was limited to 1.5%-2%. For FY22, the same is higher at 5%, translating into organic growth guidance of 7%-10% (CC). Further, management indicated that recovery in consulting segment will be a bigger (overall) growth driver (‘strong double digits’) for next fiscal. Outsourcing revenue (more relevant for Indian IT) is guided to grow in ‘high single digit to low double digits’. This hints at deceleration in outsourcing segment vs current year (13% YoY, CC) notwithstanding the ‘likely’ higher inorganic contribution and the residual base normalization. In this backdrop, as the post Covid equilibrium reaches, outsourcing growth for the industry should more or less revert to pre-covid level (8%-10%, YoY).

NIFTY IT is currently trading at a staggering ~82% premium vs long-term averages (+35% in case of NIFTY) led by (1) expectations of structurally higher growth post covid, and (2) street’s preference for ‘relative’ near-term predictability on the back of second wave impact on domestic sectors. Global tech stocks like facebook, Alphabet etc., the primary beneficiaries of digital adoption are now way cheaper (22-23x, 1-yr forward PE) than NIFTY IT (~32x) despite consensus expecting significantly higher growth rates for the former. We remain cautious as the steady state growth rates unfolding do not seem to justify the magnitude of re-rating.

How aggregate organic revenue moved since onset of Covid 19?

Source: Company, Bloomberg, I-Sec research. Note: Organic growth rates considered

How PE multiples moved since the onset of Covid 19?

Source: Company, Bloomberg, I-Sec research

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