Nifty IT Shrugs Off Accenture Forecasts As Near-Term Pain Is Seen Priced In

A gauge of India’s biggest IT stocks is the top gainer among Nifty indices, after emerging as the top loser in the previous trading session, despite an industry bellwether warning of near-term pain.

The Nifty IT rose 1.6% in early morning trade on Wednesday, with all constituents in the green. The gauge had flashed red on Tuesday. The gains were led by L&T Technology Services Ltd., Persistent Systems Ltd. and LTIMindtree Ltd. The index has risen 25% year-to-date, despite slowdown in the wider outsourcing industry.

The outperformance follows Accenture Plc’s first-quarter earnings that met estimates. The world’s largest information technology company has maintained its revenue growth guidance at 2-5% for the fiscal year ending August 2024, but disappointed on its forecast for the December-February quarter.

Clearly, the near-term pain over the next few months has been priced in. Investors in India’s top-tier IT stocks are evidently looking at the bigger picture—that of a potential lift-off in the second half of 2024.

“Accenture’s first-quarter numbers aren’t a big surprise, and neither is its forecast for a weak second quarter,” Moshe Katri of U.S.-based Wedbush Securities Inc. told NDTV Profit. “The next six months are painful (for Indian IT firms), with an inflection point likely in the June quarter.”

Katri, however, was wary of the upswing seen in IT stocks.

“My bigger concern is that the street is a bit ahead of itself in its excitement about the next 6-12 months,” he said. "The street is forgetting that there is some uncertainty at least for the next few quarters. So, it seems like their expectations are a bit too aggressive right now."

According to Katri, US-based enterprises—which form the biggest clientele for Indian outsourcers—are still cautious on their budgets, hence the continued lack of discretionary deals. From a macroeconomic standpoint, they are keenly watching interest rates. The deal flow continues to be robust, it’s their conversion into revenue that’s a concern.

Julie Sweet, Accenture’s chief executive officer, indicated as much in a post-earnings call on Tuesday evening.

“Our deep and trusted client relationships are again reflected in the 30 clients with quarterly bookings of more than $100 million,” she said. But “discretionary spending is down, we’re right in the middle of the budget cycle”.

“So next quarter, we'll have a much better view of what they are, but if you look around in the environment, there aren't a lot of green shoots on the economic side and obviously, the volatility on the geopolitical side continues.”

Revenue of the Dublin-headquartered company rose 3% year-on-year to $16.22 billion in the quarter ended Nov. 30, according to a statement released on Tuesday. That compares with the $16.19 billion consensus estimate of analysts tracked by Bloomberg.

The company expects its top line to grow at 2-5% in the fiscal ending Aug. 31, 2024, with an operating margin of 14.8-15%—an expansion of 110-130 basis points from fiscal 2023. EPS is seen at $11.41 to $11.76—an increase of 3-6% year-on-year.

Its second-quarter expectations, however, disappointed. At $15.40-16 billion, Accenture expects its revenue growth at -2% to 2%, due to a negative foreign-exchange impact.

While new bookings rose 14% over the year earlier to $18.4 billion, the contribution from the consulting practice remained flat at $8.6 billion. Geographically, the North America business shrunk 1% during Q1.