Accenture results: Beware the premature optimism in Indian IT stocks

Global technology giant Accenture’s latest earnings sparked excitement among investors in Indian IT stocks. In Q3 FY24, Accenture clocked constant-currency (CC) revenue growth of 1.4% year-on-year, slightly above the mid-point of its adjusted guidance band. Accenture follows a September-August financial year.

The Indian IT sector has been grappling with uncertain demand for quite some time and investors seem to be clutching at straws. Accenture’s earnings are often seen as an indicator of the future performance of large Indian IT companies. Reacting to its Q3 FY24 results, shares of top IT services firm Infosys Ltd, Tata Consultancy Services Ltd and Wipro Ltd gained 2-4% on the NSE on Friday.

Among other surprises, Accenture saw strong growth in deal bookings and an increased headcount. But there was no respite on the core problem, as clients remained cautious on discretionary IT spends. Accenture’s management said demand had not changed from the previous quarter. Clients continued to prioritise large-scale transformation amid slower decision-making. Accenture is also seeing continued pricing pressure across segments, which indicates a competitive environment.

Also read: Cognizant, Infosys, Wipro see fall in real estate space in a year

Revenue growth in the consulting business remained weak, down 1% year-on-year, while managed-services revenue grew 4% year-on-year. Management expects revenue growth from the consulting business to turn positive in Q4 FY24 after five consecutive quarters of year-on-year decline. But with IT demand still subdued, it remains to be seen how the recovery in this business pans out. Accenture has also tightened its FY24 CC revenue growth guidance from 1-3% to 1.5-2.5%.

Is the optimism warranted?

That Indian IT stocks rose in response to the earnings indicates that the Street is focusing only on the bright spots. According to analysts at Kotak Institutional Equities, positives from Accenture’s results may spur excitement in Indian IT stocks but some growth elements (for Accenture) such as US public services, markets such as Japan, and consulting services are not significantly addressable by Indian IT.

Another key highlight of the quarter was that Accenture struck generative AI (GenAI) deals worth $900 million. In the first nine months of FY24, GenAI deals brought in a mere $2 billion. However, it is too early to cheer.

Also read: TCS, Infosys witness dip in younger employees

“Making progress in GenAI requires building a digital core (shifting to the cloud, doing data modernisation and building cybersecurity). This could be both a source of growth and an impediment as most customers are yet to build it,” said analysts at Nirmal Bang Institutional Equities.

Valuations also remain a source of discomfort despite the moderation amid weak revenue-growth visibility. Shares of tier-1 IT stocks are trading at multiples of 20-24 times their estimated FY26 earnings, showed Bloomberg data. “While stock prices of Accenture, EPAM, Globant and Endava have gone up after Accenture’s results, do note that the multiples for such stocks de-rated considerably, unlike Indian IT,” said the Kotak report dated 20 June.

Also read: Indian IT service providers won’t have a breezy 2024

In short, a meaningful turnaround in Indian IT sector revenue growth is unlikely before FY26. The start of an interest-rate-cut cycle by the US Federal Reserve remains an important trigger for IT clients to regain spending confidence. Until then, the risk of earnings downgrades remains.

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