Explained: What Accenture's Result Means For Indian IT Companies
Weakness in the financial services and communication segment is negative news for Indian IT companies as well.
Accenture Plc. lowered its revenue guidance for the year ended August 2024 due to a slowdown in deals as macro uncertainties impacted tech spending in the near term. The Dublin-headquartered tech firm narrowed its full-year revenue guidance to 1.5-2.5% from 1-3% predicted in the last quarter due to a slower ramp-up in deals. Accenture follows the September–August fiscal.
Growth in deal wins were mainly due cost takeout amid a weakness in discretionary demand with with clients preferring large transformational deal. The management said that while the industry's long-term technology spending trends remain intact, client cautioness due to macro uncertainties is weighing on tech spending in the near-term.
The weakness in the financial services and communication segment is also negative for the Indian IT companies as for most of them, a larger share of revenue comes from the financial services space.
Record Deal Wins In Managed Services
Accenture's managed services segment—also known as outsourcing—is relevant for Indian IT companies and has seen 41% year-on-year growth during the quarter, reaching the highest ever mark of $11.8 billion. An uptick here indicates the hope of stable demand, if not an uptick. Healthy bookings to revenue conversion is also positive for Indian IT companies.
Generative AI is being viewed as another tech wave, and Accenture aims to be an early mover in adopting tech internally and is advising clients. In the third quarter, it recorded $900 million in Gen-AI deal wins. Enterprises need to further invest in cloud adoption and data standardisation to harness the true potential of Gen-AI, the management said.
Accenture's overnight stock performance, up 7%, was due to upticks in expectations in the consulting business and strong growth in Japan. However, these factors are not relevant from an Indian IT company's perspective and cannot be read through.
Brokerage Takeaways
"We believe discretionary demand is unlikely to recover meaningfully in fiscal 2025 for India IT and, therefore, maintain our cautious stance," said Abhishek Bhandari from Nomura. He 'buy' picks include Cognizant, Tech Mahindra, Coforge, Birlasoft, and eClerx, while having a 'reduce' rating on TCS, Wipro, LTIMindtree, L&T Technology Services, and Mphasis.
"Indian IT stocks have largely held firm despite a muted demand environment for the past several quarters. While stock prices of Accenture, EPAM, Globant, and Endava have gone up after the Accenture’s results, do note that multiples for such stocks de-rated considerably, unlike Indian IT," said Kotak Institutional Equities.
