Is all well for Indian IT companies after Accenture warning? And their stocks?

Is all well for Indian IT companies after Accenture warning? And their stocks?


Indian IT stocks were weak today after global giant Accenture Plc on Friday warned about a possible pullback in client spending. Nifty IT index was down 0.33%, extending this year’s losses to 26%. Infosys, TCS and Wipro were down between 0.3% and 1% in early trade as compared to a 0.2% rise in Sensex. On Friday, Accenture shares had cracked 6% in overseas markets.

After a pandemic-led boom, spending on IT and transformation projects is slowing as companies prioritize projects that deliver stronger return-on-investments in an uncertain economy.

Accenture’s warning follows HCL Tech’s guidance earlier this month that revenue growth for the current financial year would be at the lower end of its guidance due to furloughs and a drop in spending in some sectors. Last month, rival Cognizant Technology Solutions Corp slashed its revenue and profit guidance for this year, citing higher costs and pullback in contracts.

The weak outlook commentary from Accenture overshadowed otherwise its higher-than-expected revenue and earnings in the first quarter ended November 30, when sales grew 5% to $15.7 billion, surpassing an average analysts’ estimate of $15.58 billion.

In a post earnings call, Accenture Chief Executive Julie Sweet said: “Many are having to make pretty hard choices, right? Because the macro affects the industries differently. So you’ve got some industries, retail, consumer goods, that are much more challenged than say, energy. But at the same time, and we talked about starting to see this last quarter, kind of regardless of industry, as the macro uncertainty has increased, customers “are more and more focused on cost resilience and many of them are having to make really hard choices.”

Some analysts expect near-term pressure on Indian IT stocks. “The Nasdaq composite is just 5% off its 52 week low. Most Indian Technology Stocks are around 15% higher, some a bit more. Some gap to be covered on the downside,” said market veteran Sandip Sabharwal in a tweet.

New bookings for Accenture the first quarter were $16.22 billion, a 3% decrease in US dollar. Accenture’s weak bookings raise concerns over growth for Indian IT, says Motilal Oswal in a note.

“Though Accenture bookings were lower during the quarter, the management indicated continued demand strength and expects bookings to be strong in 2QFY23,” the brokerage said.

On the other hand, “a sharp 700 bps improvement in attrition and Accenture’s margin guidance implies an easing supply scenario and strong margin performance for the Indian IT industry. We continue to maintain our positive stance on the sector as we expect good demand over the medium term and strong margin recovery,” it added.

Accenture continues to expect operating margin for the full 2023 fiscal year to be in the range of 15.3% to 15.5%, an expansion of 10 to 30 basis points from fiscal 2023.

Accenture CFO KC McClure in post earnings call said: “Attrition was down to 13%, and I think all of you know, but there’s a structural pattern of attrition that typically comes down from Q4 to Q1. This year came down at a tick more, and we’re really pleased with that. And that means we have to hire fewer replacement people, it means less recruiting costs.”

TCS, HCL Tech, and Infosys remains Motilal Oswal’s preferred picks within the Tier I IT space.

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