Accenture results spark optimism, but revenue revival remains uncertain
Source: Live Mint
The Nifty IT index surged 2.5% in early trading on Friday, buoyed by Accenture’s latest earnings report. The global IT major reported 5% year-on-year revenue growth in constant currency (CC) for the quarter ended August (Q4FY24), exceeding the mid-point of its 2-6% guidance. Accenture follows a September-August financial year, and the company’s results are often viewed as a bellwether for India’s tier-one IT firms.
Significantly, Accenture’s consulting business—largely discretionary—returned to growth after six consecutive quarters of decline. The company expects CC revenue growth of 2-6% for Q1FY25 and 3-6% for FY25, with organic growth guidance for FY25 set at 0-3% (compared to -1% in FY24). Growth is expected to be broad-based, with both consulting and managed services projected to deliver low-to-mid single-digit growth in FY25.
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However, in spite of improved growth across geographies and segments in Q4FY24, the management indicated that there is no notable change in the demand environment. Clients continue focusing on cost optimization programmes and use the savings to invest in transformation projects.
The management anticipates IT budgets to provide better clarity on demand in January-February. This was attributed as the reason for shifting the promotion cycle from December to June.
These mixed signals have left IT investors guessing on revenue visibility. Accenture’s guidance and the ensuing outlook reduce the downside risk to growth estimates, but the slope of recovery, and how broad-based the recovery would be is still up for debate, pointed out Motilal Oswal Financial Services.
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True, the US Federal Reserve began its monetary policy easing cycle with a large 50 basis point cut in interest rates, but the upcoming US elections could keep IT clients from revising their IT spends significantly higher. “The most important catalyst for the sector would emerge after Q3FY25, when client budgets for CY25 would be finalized and the magnitude of change in client behaviour would become clearer,” added the Motilal Oswal report.
As things stand, with no definitive cues on demand outlook, deal wins will be critical for assessing the sector’s health. “Deal wins will be a key enabler of differentiated growth for Indian IT similar to the current fiscal. We believe there are not enough large deals in the market to satisfy all players,” said Kotak Institutional Equities report. Clearly, a delayed improvement in discretionary demand and continuing lag between deal conversion to revenues poses a risk to FY25 and FY26 consensus earnings estimates of Indian IT companies.
Meanwhile, optimism about a demand recovery has supported strong gains in the Nifty IT index, which has rallied 18% over the past three months, outpacing the Nifty50’s 9% increase. However, without a significant uptick in demand for IT services, further outperformance may be limited.
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“Accenture guidance and commentary suggest that rebound in discretionary spend might be later than we earlier thought,” said JM Financial Institutional Securities Ltd report dated 26 September. “Besides, a low-to-mid single digit outlook in managed services – a closer proxy for India IT Services demand – means the ramp-ups are still slow or leakages still persist,” it added.
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Against this backdrop, valuations of Indian IT companies offer little comfort and the sharp up-moves in IT stocks will likely trigger bouts of profit-booking.
