Infosys, Wipro, TCS: As Accenture shares weak guidance, trouble mounts on Indian IT stocks

Accenture, which follows September-August as financial year, has guided for lower-than-expected fourth quarter growth, in addition to suggesting pricing pressure in select industries that were doing well. This may not bode well for Indian IT stocks such as Tata Consultancy Services, Infosys, Wipro and HCL Technologies and also Tier II IT stocks that relies on small size deals. Accenture's commentary was similar to recent commentary by Cognizant, EPAM, Coforge and HCL Technologies. Analysts said while consensus estimates for revenue and earnings for FY24 have already been lowered for Indian IT Services companies, there could be risks to expectations of a strong rebound in FY25.

"We believe the Street is not taking this into account and could weigh on margins in FY24. In our models,

we have assumed modest pricing pressure, but we believe this could be a bigger issue as we go into H2FY24," said Nirmal Bang Institutional Equities.

This brokerage said it is ‘underweight’ on the Indian IT Services sector, especially for the Tier-2 set whose dependence on ‘small deals’ is quite significant.

The Accenture management marginally trimmed the upper end of the guidance for FY23 to 8-9 per cent from 8-10 per cent and expects growth to be in the range of 2-6 per cent in 4QFY23.

Nomura India remained concerned on the demand outlook for Indian IT services and expects 480 bps slower revenue growth at 6.1 per cent for large cap IT firms in FY24. It expects operating performance to vary significantly across companies in FY24 and prefers Tech Mahindra in large caps and Coforge in mid-caps. It maintained its 'Reduce' rating on TCS.

"Lowering of revenue guidance by Accenture indicates continued softening demand for IT services. Moderating deal bookings momentum (due to lower-than-expected smaller duration projects) and cut in total headcount indicate rising near-term demand uncertainty for the industry, in our view," Nomura India said.

Accenture's third quarter results were close to the top-end of its guidance. Managed Services (Outsourcing) revenue grew strongly (10.5 per cent YoY) but Consulting revenues remained soft (down 3.8 per cent YoY). Overall bookings was strong at $17.2 billion, 4 per cent CC YoY, with outsourcing bookings rising 6.1 per cent YoY.

Accenture trimmed the top end of its FY23 revenue guidance by 1 percentage points — lower than what Street had been building in. Management expects Outsourcing to grow in double digits in Q4FY23 (as it has over 9MFY23), and Consulting to decline.

The Accenture's management suggested that Q4 bookings should be similar to Q4 levels. It sees a decline in small deals.

Motilal Oswal Securities said the near-term uncertainty continues to pose challenges on growth visibility of key verticals (Financial Service and CMT) and geography (North America). It remains selective on tier-1 names and prefer TCS followed by HCL Technologies and Infosys.

"In the near term, we believe it's safer to play a sector with large-caps where valuations are closer to 10-year average multiples now. Among mid-caps we should be selective and prefer stocks with solid deal momentum like Coforge and Persistent Systems. We prefer to stay away from ER&D space such as LTTS and Cyient in the near term," it said.

Accenture's decent performance in Europe region in comparison to North America region is expected to bode

well for Tata Consultancy Services, Mastek and Coforge in the near-term, said B&K Securities.

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