Accenture's Forecasts Signal Bumpy Road Ahead For Indian IT

Accenture Plc cut revenue guidance for its ongoing financial year citing slowing client spending, prompting concerns for India's software services providers in their biggest market.

Clients' budgets reveal further tightening of the tech budget over the last quarter, particularly on small deals, the company's management said. This was negative for the IT sector as discretionary spends remain under pressure, according to Jefferies.

Accenture expects to grow by 1-3% in FY24, compared to the 2-5% estimated earlier. It also lowered its operating margin to 14.8% versus 14.8–15% earlier, according to the company's statement. Accenture follows September–August as its financial year.

The company recorded a flat second quarter, even as dealmaking rose to the second highest level ever in the three months ended February 2024.

The second quarter was flat at $15.8 billion. The margin was up by 70 basis points year-on-year at 13%. It also witnessed New Gen AI bookings of $600 million in the second quarter.

Nifty IT also faced pressure, with the index falling over 3%. HCL Technologies Ltd. led the fall with a decline of over 5%, followed by Mphasis Ltd. at over 4%. Coforge Ltd., LTIMindtree Ltd. and L&T Technology Services which were down over 3.5%.

• Managed services growth slowed down to 3% year-on-year, the slowest in over a decade, while consulting revenues declined by 3% year-on-year.

• North America (flat year-on-year) was soft, while EMEA (3% year-on-year) deteriorated—the first instance of revenue decline in 13 quarters.

• Revenue weakness was broad-based, with CMT (-7% year-on-year) and FS (-6% year-on-year) verticals particularly weak and growth in the Products and Resources verticals also being soft (flat to 4% year-on-year).

• Accenture reported strong deal bookings of $21.6 billion, the second highest ever. This could be driven by large-scale transformations or cost takeout deals.

• However, deal bookings were at a record high of 20 last year and actually fell 2% year-on-year this quarter. This suggests that strong deal bookings could be partly attributable to favourable seasonality.

• The decision-making process remains slow, and the pace of spending slowed down in the second quarter of FY24.

• "The management believes that the long-term fundamentals of the sector are intact and emphasises the strong traction in GenAI as well.".

• Net hiring turned negative again in Q2 with a pickup in utilisation, indicating lower confidence in growth.

• Nomura believes discretionary demand is unlikely to recover meaningfully in 1HFY25F for India IT and maintains a cautious stance.

• "While revenue growth for large-caps should improve in FY25F, we expect it to be driven by cost take-out deals,"  it said.

• Accenture noted that due to macro, political and sector-specific uncertainties, its clients have further tightened their spends on smaller projects and continue to prioritise spending on cost optimisation initiatives.

• There is no revival of client discretionary spends yet, as they are linked to macroeconomic conditions.

• Clients continue to prioritise investing in large-scale transformations, which convert to revenue more slowly while further limiting discretionary spending, particularly on smaller projects.

• Accenture also saw continued delays in decision-making and a slower pace of spending.

• Clients are navigating an uncertain macro-environment due to economic, geopolitical and industry-specific conditions.

• The workforce remained stable in 2Q at around 742,000 employees, while attrition increased by 200 basis points quarter-on-quarter to 13% and utilisation rates moved up to 92%.

• Inorganic growth component to 3% from 2%; organic revenue decline by 1%.

• Global peers are guiding modestly weaker growth in 2024 vs. 2023.

• The revenue growth guidance range of 4–7% assumed for Infosys and HCL Technologies for FY25 may be at risk.

• A weak exit from FY24 and a possible weak start to FY25 for Indian IT companies are expected.

• Brokerage maintains an ‘underweight’ stance on the Indian IT services sector.

• ‘The slower for longer’ phenomenon could lead to further downward earning revisions.

• The Tier-2 pack has held out better than anticipated.

• Nirmal Bang maintains TCS as its industry valuation benchmark.

• Accenture highlighted further cuts in short-cycle discretionary projects, a negative for companies such as Wipro, LTIM, Mphasis and Infosys, where estimates incorporate some recovery in discretionary spending.

• Noting the weak near-term demand, Kotak expects large IT services companies to start FY2025E with a cautious guidance.

• Growth will vary considerably across companies on the basis of mega-deal ramp-ups, vertical exposure and discretionary spending.

• The strong pick-up in Gen AI bookings has not meant better discretionary spending. Cuts in other parts of discretionary spending have been used to fund generative AI experimentation budgets.

• Cloud, data, AI, security, and modern platforms such as ERP and security continue to present elevated opportunities for Accenture. As client spending increases, Accenture can benefit from pent-up demand.

• Revenue growth will increase on a year-on-year basis in 2HFY24 due to a higher contribution from inorganic growth and the ramp-up of large deals.