Sunday, June 16, 2024

Should Indian IT companies worry after Accenture’s 2023 growth guidance? These 2 tech stocks are top picks

In the second quarter of fiscal 2023, Accenture posted a 5% rise in revenue in US dollars to $15.8 billion. The increase would be 9% in local currency from the same period of the previous year.

Further, in the quarter, GAAP operating income was $1.94 billion, compared to $2.06 billion for the second quarter of last year, and the operating margin was 12.3% compared to 13.7% for the second quarter of last year.

Meanwhile, new bookings in the quarter were at a record of $22.1 billion up by 13% in US dollars — with consulting bookings of $10.7 billion and managed services bookings of $11.4 billion.

For Q3 of fiscal 2023, Accenture expects revenues to be in the range of $16.1 billion to $16.7 billion, an increase of 3% to 7% in local currency, reflecting the company’s assumption of an approximately negative 3.5% foreign-exchange impact compared with the third quarter of fiscal 2022.

While for the overall fiscal year 2023, Accenture expects revenue growth to be in the range of 8% to 10% in local currency, compared to 8% to 11% previously.

The Dublin-based tech major also trimmed its GAAP operating margin outlook for fiscal 2023 to be in the range of 14.1% to 14.3%, compared to 15.3% to 15.5% previously. Also, Accenture expects GAAP diluted EPS to be in the range of $10.84 to $11.06, compared to $11.20 to $11.52 previously.

Analysts at ICICI Securities in a report, said, “even though Accenture (ACN) has cut the top-end of its FY23 (Aug-ending) revenue growth guidance to 8-10% from 8-11% earlier, the mid-point of its organic growth guidance of 6-8% is same as that of earlier guidance of 5.5%-8.5%. ACN reported healthy revenue growth of 9% YoY CC in Q2FY23, near the upper end of its guidance of 6-10%.”

Apart from growth guidance, the brokerage highlighted that Accenture’s net headcount addition was meagre at just 425 employees, flat QoQ, +6% YoY. The company also cut 19,000 jobs (2.5% of total workforce) – a strategy to combat wage inflation and reduce structural costs (50% of the job cuts were in non-billable corporate functions). Also, its CMT vertical reported flattish YoY CC growth due to a cut in technology spend by clients in North America and slower growth in the software and platforms business.

Furthermore, ICICI Securities gave excerpts of Accenture’s earnings call. Under this, Q3 (March to May) bookings are expected to be weak QoQ on a record high base of Q2. Deal conversion to revenue is slower, especially in S&C and SI deals. Pipeline has higher share of larger deals (less of smaller deals), which take longer to convert.

Also, Accenture’s s exposure to financial services (20% of revenue) is more skewed towards larger banks. In this vertical, clients are focusing on reducing technical debt, i.e. shift from mainframe services to agile systems. Asset management and insurance clients are in the process of digitising their core systems. However, Accenture management acknowledged that they see a bit of slowdown in BFSI, the brokerage mentioned.

Despite the snags, ICICI Securities analysts in their note said, “there is significant cut to ACN’s organic growth guidance, with mid-point of guidance maintained, despite concerns in BFSI sector due to crisis of confidence across US and Europe. We believe that recent events in the global BFSI space may not lead to more than 2-3% EPS cut for our covered companies vs fall of ~9% in NIFTY IT in past one month.”

The brokerage’s note added that “we see no significant decline in demand given ACN’s strong bookings and healthy pipeline. Client focus on cost-optimisation deals bodes well for Indian IT companies given their expertise in large cost-optimisation deals.”

Noteworthily, the brokerage pointed out that there could be a delay in deal signings or conversion of deals to revenue in the next couple of quarters in their view, which is also the feedback they have got from their covered companies ahead of their silent period.

Amidst this, in regard to which Indian IT stocks to invest in, the brokerage’s note said, “we prefer high-quality large-cap companies with the ability to win large cost-optimisation deals, which are more prevalent in the current environment. We reiterate Infosys and TCS with ~28%/22% potential upside, as our top picks. TCS, INFY fell ~8-11% in last one month and are trading at attractive multiples of 20.5x/19x on FY25E EPS.”

TCS is the second largest company and the largest IT firm in terms of market capitalisation in India, while Infosys is the sixth largest company and the second major in its sector.

Last week, on BSE, TCS’ share price closed at 3,121.45 apiece on Friday, marginally down from the previous closing. On the other hand, Infosys’ share price ended in green at 1,380.45 apiece.

By end of March 24, 2023, TCS market cap is over 11.42 lakh crore, and Infosys’ valuation is nearly 5.73 lakh crore.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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