Accenture’s recently released Q4 results, along with its deal bookings and FY24 revenue growth guidance, offer insights into the challenging recovery path faced by the Indian information technology (IT) sector. Accenture follows a September-August financial year, and its performance is closely watched as an indicator of the earnings outlook for Indian IT companies. Unfortunately, the latest results from Accenture indicate ongoing challenges for the sector.
In constant currency terms, Accenture’s year-on-year revenue growth has continued to narrow for the sixth consecutive quarter, reaching 4%, which falls within the mid-point of its 2-6% guidance. This growth was primarily driven by its managed services and outsourcing business, where it competes with tier-1 Indian IT companies. While this suggests market share gains for Accenture, its consulting business showed weakness, which could have implications for companies like Wipro Ltd that have exposure to this segment.
The IT sector is grappling with weak discretionary spending and slower decision-making by clients, largely due to macroeconomic uncertainties. Accenture’s Q4 results reflect this challenge, with deal bookings falling by 10%, particularly in the managed services segment. Clients are showing greater caution, even for shorter deals, and this cautiousness is now affecting larger deals as well.
For tier-2 Indian IT companies, which rely more heavily on short-cycle deals, this situation poses challenges, especially given their relatively high valuation multiples. Additionally, it suggests that the ramp-up of large deals may take longer, further impacting the sector’s revenue growth trajectory for FY25, which is a cause for concern.
Overall, Accenture’s management commentary indicates a tougher-than-anticipated macroeconomic environment for FY23. Accenture’s FY24 revenue growth guidance of 2-5% is relatively modest, considering it achieved 8% growth in FY23. While Accenture’s FY24 guidance does not factor in any improvements or deteriorations in the macroeconomic and discretionary spending environment, it anticipates a pickup in demand towards the latter part of the year.
Those hoping for a rapid turnaround in the earnings of Indian IT companies may be disappointed. Accenture’s FY24 organic growth guidance (ranging from 0% to 3%) coincides with the second half of FY24 and the first half of FY25, a period when the street had expected a rebound for Indian IT. According to an Ambit Capital report, Accenture’s weak Q1FY24 guidance (-2% to +2% year-on-year in constant currency) suggests that hopes for a H2 recovery in the Indian IT sector might be overly optimistic. This raises the possibility of a correction in the Nifty IT index, which has already risen by 11% in 2023 on expectations of a recovery.
While the Indian IT sector has shown resilience in the face of challenges, a swift and robust recovery may still be some distance away, and market conditions will need to improve significantly to support such a turnaround.
