Infosys, HCL Tech, TCS, Wipro, TechM shares: Accenture’s Q1 growth has cues on Q2 IT results, stock valuations

Accenture’s Q1FY24 growth at 1 per cent in constant currency terms was within its guided band of minus 2 per cent to 2 per cent but came in the slowest since pandemic. Brokerages noted that the incremental deceleration over the past couple of quarters has come from the Managed Services ((Outsourcing) segment, which is a close proxy for India IT Services demand. Communications, media and tech industries (CMT) and Banking, Financial Services and Insurance (BFSI) continued to be pain-points; products seem to have joined the list, analysts said.

The read-through for five large domestic IT firms namely Tata Consultancy Services (TCS), Infosys Ltd , Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd: do not expect a quick recovery in demand as clients continue to be in a mode of caution.

Nirmal Bang Institutional Equities said while customer spending behaviour has not changed much in the last few months despite a more dovish Fed and with 10-year yields down by 110 basis points over the last two months. It said, maybe, it is too early to gauge the change. The brokerage said the weak guidance for 2QFY24 (hinting at a sequential decline in revenue could mean a weak December quarter for most Indian IT companies largely due to higher furloughs and fewer working days.

"We believe the recent rally in Indian IT Services stocks may be premature," the brokerage said.

Nirmal Bang remained ‘underweight’ on the Indian IT Services sector, as it believes a shallow recession is likely in 2024 leading to consensus estimates being downgraded for both revenue and margins and also leading to a PE multiple compression.

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"A soft Q2 guide (minus 2 per cent to 2 per cent), despite a favourable comp, suggest trend reversal, if any, would be back-ended. In fact, lower end of Accenture's FY24 organic growth guidance (now slightly below 0-3 per cent) implies no improvement even in H2. The management indicated no change in demand environment – persistent weakness in BFS, CMT and discretionary spend. Budget conversations, though not concluded, are still revolving around spend reprioritisation. Even genAI spends are not incremental. These point to a flattish 2024 IT budgets. Fed-pivot has raised hopes of demand inflection in the sector. But no visible green shoots, as indicated by Accenture mean expectations (and multiples) are running ahead of fundamentals," JM Financial said adding: "That could be a risk."

Nomura India said discretionary demand is unlikely to recover meaningfully in H2FY24 and likely in the early part of FY25 for India IT, as it maintained its cautious stance. While growth for large-cap should improve in FY25, Nomura said it expects it to be driven by cost take-out deals.

Nuvama said Accenture's dollar revenue at $16.2 billion was up 3 per cent YoY, which was is in line with Street’s estimate. Managed Services (Outsourcing) grew at (6.4 per cent YoY) while Consulting remained flat (0.1 per cent YoY). Overall bookings, Nuvama said, came in strong at $18.5 billion, up 13.7 per cent YoY, with outsourcing bookings at $9.8 billion up 21.2 per cent YoY.

"Accenture's numbers and guidance need to be looked at ex-Consulting for a read-across for the Indian IT Services companies. On that front, its revenue growth, order bookings and next 12 months’ guidance are all encouraging. We maintain our positive stance on the sector, and expect a sustainable strong demand environment to drive strong earnings growth over the next three years

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