Despite layoffs, Accenture Q2 outlook a relief for IT companies

Despite the layoffs announced by IT services and consulting major Accenture, the firm’s Q2 results outlook came as a breather for the Indian IT services sector, which has been under cloud ever since the banking turmoil in the US and Europe, said analysts.

Accenture’s performance was evident among Indian IT stocks, which were up in the early hours of trading.

Nifty IT opened at 28,208, up 0.75 per cent over the previous close, touched a high of 28,454 (up 1.62 per cent), before closing at 27,936 (down 0.23 per cent).

Accenture, which follows a September-August financial year, reported revenues of $15.81 billion for the second quarter. This compares with $15.05 billion for the second quarter of FY22, an increase of 5 per cent.

New bookings for the quarter were at a record $22.1 billion. Consulting bookings stood at $10.7 billion and managed services bookings were at $11.4 billion.

What has made the Street positive about the sector is the management commentary.

Julie Sweet, chair and chief executive officer (CEO), Accenture, had said that the company sees strong demand for larger transformational deals.

“We see no significant decline in demand, given the strong bookings and healthy pipeline. Client focus on cost-optimisation deals bodes well for Indian IT companies. This is given their expertise in large cost-optimisation deals. There could be delay in deal signings or conversion of deals to revenue in the next couple of quarters,” said a report by ICICI Securities.

What comes as a positive is that Accenture’s managed service (which is where it competes with Indian players) bookings were also at a record $11.4 billion.

A Kotak Institutional Equities report said that Accenture’s results and outlook indicate that the demand environment is slowing down. But, the nature of demand is shifting from discretionary-led to a mix of cost take-out and discretionary.

“Core modernisation is receiving a larger focus as well. The current demand environment favours those with strength in types of programs and core modernisation. TCS and Infosys fit the bill in tier-1, whereas LTIMindtree and Mphasis can benefit in mid-tier,” said the Kotak report.

On the ongoing banking turmoil, the management of the company, though cautious, said the larger banks are still not impacted. Sweet said that the company works with large banks and the impact is still too early to predict.

“There is no significant cut to the organic growth guidance, with mid-point of guidance maintained, despite concerns in the BFSI (banking, financial services and insurance) sector. We believe that the recent events in the global BFSI space may not lead to more than 2-3 per cent EPS cut for our covered companies versus a fall of 9 per cent in the Nifty IT in the past one month,” said the ICICI Securities report.

On the layoffs, analysts pointed out that Indian IT services firms should also evaluate their people strategy.

“They said that this does not reflect demand weakness. It, however, does indicate pressure on margins, exacerbated likely by higher share of large deals and relatively-lower growth. We see such action as necessary for Indian IT players as well as a slower growth and falling inflation make utilisation and pyramid correction difficult levers to pull,” said JM Financial research.

AGAINST THE ODDS

• 
  $15.81 bn Company’s revenues in second quarter of FY23
• 
  $15.05 bn Company’s revenues in second quarter of FY22
• 
  $22.1 bn New bookings for the quarter
• 
  $10.7 bn Consulting bookings for the quarter
• 
  $11.4 bn Managed service bookings
• 
  8-11% to 8-10% Reduction in FY23 fiscal revenue growth
• 
  Headcount growth was slow at 425 employees; expects to see uptick in hiring only in Q4