TCS, Infosys, Wipro, HCL Tech shares: What Accenture's narrow growth guidance suggests

IT major Accenture has narrowed its revenue growth guidance for FY24 to 1.5-2.5 per cent from 1-3 per cent earlier. It had initially suggested a growth guidance of 2-5 per cent. Analysts tracking the IT sector believe while the demand environment is stable, it is too early to say if the growth is coming back. Two positives from Accenture's commentary for Indian IT firms include consulting business returning back to growth in Q4 and bookings-to-revenue conversion improving gradually, analysts said.

Other than that, discretionary spending continues to remain under pressure, decision making is slow and small deals --which could convert into revenue faster --  are fewer in number as was the case in recent quarters. 

"Today's results suggest not much has changed since last quarter, which is a relative positive, given the magnitude of the guide down that occurred last quarter. While overall near-term demand remains weak, it does not appear to be deteriorating," Jefferies said. 

The strong outsourcing bookings are noteworthy, which suggests demand for big transformation projects remains intact, the foreign brokerage said. "The counter to this is the continued softness in Consulting bookings, which grew only 4 per cent YoY
despite AI bookings now totaling an estimated 10 per cent of consulting bookings," it said.

Pricing pressure persists across the business, reflecting a very competitive market, Nirmal Bang Institutional Equities said. Accenture's guidance has left the inorganic growth component unchanged from Q2FY24 at 3 per cent. Effectively, it is guiding for an organic revenue decline of 1 per cent, same as it did three months back, the brokerage said

"4QFY24 is expected to show 2-6 per cent YoY growth. A similar dollar revenue number as 3QFY24 in 4Q would imply 7.1 per cent YoY growth. There seems to be seasonal weakness in 4Q which explains the weaker number that has been predicted. 4Q is supposedly boosted by a higher M&A component and start of execution of many large deals won by Accenture," Nirmal Bang said.

Accenture reported Q3FY24 revenue of $16.5 billion, up 1.4 per cent in constant currency (CC) terms, in line with Street estimates, led by growth in Managed Services, up 4 per cent in CC terms at $8.01 billion, while the Consulting business remained muted. 

Bookings came in strong at $21.1 billion against Bloomberg estimate of $17.7 billion. 

Why Accenture matters?
Accenture reported $64.5 billion in trailing 12-month  revenue. It is into consulting and IT Services space and has been consistently gaining market share. Accenture works with 80 per cent of Global 500 corporations. It has deep relationships with its customers, with 99 of its top 100 customers having been with it for more than 10 years. 

Following Accenture is critical to understanding the offshore IT/ITES industry business dynamics because 75 per cent of its 750,000 workforce (as of 3QFY24) is based in the global delivery network (low-cost locations like India, Philippines, etc) with possibly 3,25,000 in India. 

"Managed Services (outsourcing) accounts for a very large part of its revenue (49 per cent on TTM basis, the other being Consulting), where we believe it is up directly in competition with India-centric IT players like TCS, Cognizant Technology Solutions or CTS, Infosys, Wipro, HCL Technologies, Tech Mahindra, etc," Nirmal Bang noted.

Read-through for Indian IT peers

Emkay Global said the management commentary on the demand environment was largely unchanged, with clients continuing to limit discretionary spending and the delay in decision-making persisting, particularly for smaller deals. However, the company maintained the mid-point of its guidance. This, it said, points to a broadly stable demand environment. 

"Also, Q4 guidance of 2-6 per cent growth in LC indicates a steady FY24 exit. The stability bodes well for Indian IT companies, even as a full-fledged recovery is now expected in CY25/FY26. We expect the start of the interest rate-cut cycle to act as a signaling trigger for clients, to gain confidence on the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending," Emkay Global said.

Nuvama said Accenture's management called out two positive read-across for Indian IT companies: consulting to return to growth in Q4; and bookings-to-revenue conversion gradually improving. Both these are incrementally positive for Indian IT companies, it said. 

"Indian IT Services companies have been reeling under the low deals-to-revenue conversion, and any signs of that improving is positive. Also, we believe FY25 Street estimates for Indian IT Services companies have been adequately rationalised, and they face little downgrade risk from current levels. We maintain our positive stance on the sector, and expect a sustainable strong demand environment to drive healthy earnings growth over the next three years," it said.

Antique Stock Broking said the strong outsourcing bookings with a book-to-bill of 1.5 times bodes well for Indian IT as it has also been announcing strong deal flows in the past few months that should be reflecting in 1QFY25 deal bookings.

"Accenture's results suggest that the macro environment continues to be uncertain and clients remain cautious about non-AI discretionary spending, particularly in smaller projects. They also allude to a strong bounce back once discretionary spends pick-up. Strong revenue and bookings in GenAI indicate to the opportunities it brings to service providers in the medium to long term," Antique Stock Broking said. 

IT stocks to watch
Emkay Global said IT firm earnings downgrade to bottom out in H1FY25, if current expectations on interest rate cut materialise. Its pecking order is Infosys, HCL Technologies, Wipro, Tech Mahindra, TCS, and LTIMindtree in large caps. Among mid-caps, it prefers Cyient, Birlasoft, Zomato, Firstsource Solutions and Mphasis.