Accenture Q2 earnings provide strong demand for Indian IT companies

The key read-through from Accenture’s strong Q2FY22 results for the India IT services sector is the strong demand environment, said Japanese brokerage firm Nomura in its recent note.

The Ireland-based multinational information technology services company recorded a massive 28 percent year-on-year growth, in terms of constant currency, in revenues at $15 billion for the quarter ended February. Growth in dollar terms was 24 percent YoY.

Reported revenues were higher than the guidance band of $14.5-14.75 billion. The company follows March-February as its financial year.

Growth was driven by both the firm’s segments – consulting that contributed 55 percent to revenues grew 34 percent YoY in constant currency terms to $8.32 billion, and outsourcing registered 23 percent increase year-on-year in constant currency terms.

“Outstanding second-quarter financial performance demonstrates continued strong broad-based demand across all our markets, services and industries,” said Julie Sweet, chair and CEO at Accenture.

Net income for the quarter recorded at $1.66 billion, up from $1.46 billion for the second quarter last year.

The IT major has raised its full-year FY22 revenue growth to 24-26 percent in local currency against 19-22 percent growth expected earlier. It now expects operating margin for the full fiscal year to be 15.2 percent, an expansion of 10 basis points from fiscal 2021, against earlier expectations of 10-30 basis points expansion in margin.

“The entire increase in guidance is organic,” said Nomura.

For the third quarter, Accenture expects revenues to be in the range of $15.70-16.15 billion, an increase of 22-26 percent in constant currency.

But, “third quarter and full year business outlook does not include assumptions for a significant escalation or expansion of economic disruption or the conflict’s current scope, which could have a material adverse effect on the company’s results of operations,” said Accenture in its release.

The invasion of Ukraine by Russia and the sanctions and other measures being imposed in response to this conflict have increased the level of economic and political uncertainty, the company feels.

In its recent note, Nomura had flagged that a prolonged war leading to significant weakness in the eurozone GDP growth rate could lead to India IT companies sounding caution in their FY23 outlook and guidance in the coming weeks.

IT stocks had seen a sharp correction from highs, before recent recovery. The Nifty IT index fell 18 odd percent during January 4-February 24 but has gained 10 percent since.

Accenture’s new bookings for the second quarter were a record $19.6 billion, an increase of 26 percent in constant currency over the corresponding quarter last year as the pipeline of demand is strong.

Accenture noted that it has begun to see some effects of price increases in Q2FY22 and expects further boosts in coming quarters. “Newer contracts are coming in at better pricing, which may help to offset margin headwinds, particularly from higher-than-usual salary hikes at both onsite and offshore locations for India IT services companies, in our view,” said Nomura.

On the outlook, Abhishek Bhandari, who tracks India technology/services & software sector at Nomura, said they are positive on the demand outlook for India IT services particularly aided by demand for transformational services and cloud adoption.

“We expect cloud adoption to be a multi-year cycle leading to industry growth rate to be around 1.5x of pre-pandemic levels,” he added.

In largecaps, Nomura’s top picks are Infosys and Wipro, and in midcaps, top pick is Persistent Systems.

The brokerage maintains a buy rating on Wipro with a target of Rs 850, implying 41 percent potential upside; buy rating on Infosys with a price target of Rs 2,440, implying 31 percent potential upside from current levels, and buy on Persistent with a target price of Rs 5,330, implying 19 percent potential upside from current levels.

The attrition rate for Accenture increased by 100 basis points QoQ and 600 basis points YoY to 18 percent. “Heightened demand is likely to keep attrition high in both onshore and offshore locations for the next few quarters for India IT companies,” said Nomura.

Accenture’s upgrade in FY22 guidance provides visibility to the Indian IT services sector’s growth momentum. While supply-side challenges remain a point of concern, Accenture’s margin guidance implies stable margin performance in FY23, said a report by Motilal Oswal.

“We maintain our positive stance on the sector as we expect sustained growth with stable margins. Infosys, HCL Technologies and TCS remain our preferred picks within the Tier I IT space,” it said.

Ramkumar Ramamoorthy, Partner at Catalincs, a tech advisory firm, said Accenture’s strong growth guidance is a big positive for Indian IT across large and mid-tier companies. Those that have deep consulting, digital and domain capabilities, coupled with the ability to recruit quality tech talent at scale, will be the biggest beneficiaries of robust discretionary spend of enterprises.

With only 30 per cent of the workloads having moved to the Cloud, and many enterprises still in early stages of transforming themselves to the demands of Industry 4.0, ESG and cyber-security, a long-term, double-digit growth seems a likely reality for all growth-oriented Indian IT companies.” Moneycontrol