Accenture's Q3 earnings: The good and the bad
Premium- Accenture's management indicated a strong demand environment and order bookings and added that there has not been any change in the decision-making cycle by its clients
The earnings of US-based IT company Accenture are often seen as an indicator of the performance of the Indian IT sector. The good news is that Accenture's March-May quarter results were decent. Revenue growth of 27% year-on-year in constant currency terms was ahead of the upper end of guidance, aided by broad-based growth across verticals and geographies.
For the full year ending August, Accenture has raised its revenue growth guidance to 25.5-26.5% from 24-26% earlier. Note that the company follows a September-August financial year. The company's management indicated a strong demand environment and order bookings and added that there has not been any change in the decision-making cycle by its clients.
"The guidance increase is large enough noting that just one quarter remains for completion of FY2022. Revenue growth guidance for 4QFY22 at 20-24% is remarkably strong," analysts at Kotak Institutional Equities said in a report on 23 June.
Fears of a recession leading to possible reductions in IT spending by clients have weighed on investors' sentiment towards the IT sector. Worried over it, some global research houses recently downgraded Indian IT stocks, trimming their earnings estimates for FY23. Consequently, IT stocks have been under severe pressure.
Against this backdrop, Accenture's Q3 earnings do provide some comfort, but they do not completely take away the concern of a slowdown.
"In our view, the deteriorating macro is beginning to show up in some metrics. The net hiring number at ~12,000 is the lowest one has seen in the recent quarters (last 5 quarters’ average is ~37,000)," analysts at Nirmal Bang Institutional Equities said in their report on Accenture's Q3FY22 earnings. This tends to be a lead indicator, especially for a company where utilisation levels have been high. The domestic brokerage house also pointed out, cost take-out apparently is becoming an increasing discussion point with some clients.
Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said a read through for Indian IT services sector from Accenture's result is that while FY23F demand outlook remains strong, “we expect it to slowdown faster than consensus’ estimates for FY24F". Nomura is among those who have downgraded the Indian IT sector.
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Secondly, attrition remains high and sticky. "Accenture noted that the uptick in attrition to 20% during the quarter was led by India and primarily at the lower end of the pyramid," said the Nomura report. Further, it has also warned of cross currency movements being a material headwind for the Indian companies in FY23.