Accenture Q2FY22 results and what it means for the Indian IT sector

Information technology (IT) companies advanced up to 2 per cent on the bourses on Monday as investors assessed the implications of Accenture's solid Q2FY22 results for the Indian IT sector.

Wipro, Tech Mahindra, Infosys, Coforge and Mphasis from the Nifty IT index advanced in the range of 1 per cent to 2 per cent in the intra-day trade. The Nifty IT index, meanwhile, added 0.8 per cent in intra-day trade.

Last week, the Dublin-based company reported revenue at $15 billion, up 24 per cent YoY in dollar terms and 28 per cent in local currency, driven by broad-based over-delivery across verticals, geographies and priority services. Order inflow at $19.6 billion, up 26 per cent YoY in local currency terms, was the highest ever. Accenture also raised the revenue guidance for FY22 from a range of 19-22 per cent growth in LC terms (and 12-15 per cent at the start of FY22) to 24-26 per cent growth.

For analysts at Motilal Oswal Financial Services, Accenture's positive commentary indicates a healthy pipeline and strong spends in areas of digital, cloud, Web 3.0 and security. "Only 30 per cent of workload is on cloud. Thus, acceleration of cloud adoption will open further opportunities for IT companies and provide a sustained demand environment. Given Accenture's tendency of increasing guidance over the quarters, its Indian IT services peers would be closely watched for their commentaries on FY23 as expectations on growth escalate,” their analysts said.

That said, Accenture's order wins, downward revision in Ebit margin, and the evolving Russia-Ukraine conflict need to be closely watched, said analysts.

"Given the current challenging macro-economic situation, it remains to be seen if the FY22 guidance given by Accenture goes through further upward revisions, as it does not include any impact from the ongoing Russia-Ukraine crisis," cautioned Nirmal Bang.

While the IT consulting firm's Q2FY22 numbers didn't reflect the impact of the war, it cautioned that its operations could be adversely impacted if the Russia-Ukraine conflict escalates. Accenture expects only 10 bps YoY improvement in margins for FY22 relative to 10-30 bps YoY improvement earlier. The company's revenue in Russia stood at $120 million during fiscal 2021.

"Events over recent weeks pose near-term risks for Indian IT with respect to delays in client decision making, potential risks to margins emerging from likely rebound in travel expenses in H1FY23 itself, and elevated supply side pressures (further exacerbated by the recent Ukraine crisis) which will lead to a near term pause to the revenue growth led earnings upgrade cycle," highlighted JM Financial.

Secondly, investors, analysts suggest, need to closely watch out Indian IT companies' deal wins as Accenture has been consistently gaining market share.

"The IT consulting firm has been talking about 3x industry growth in recent days versus 2x in the past. In contrast, the narrative among Indian IT players has been about mid-sized and more importantly small-sized deals over the last 12 months. Thus, the record signing of over $100 million deals in Q2FY22 indicates that Accenture is gaining even greater share in mid and large deals," Nirmal Bang said.

Separately, outsourcing accounts for a very large part of Accenture's revenue, where it is in direct competition with TCS, Cognizant Technology Solutions, Infosys, Wipro, HCL Technologies, Tech Mahindra, etc, it added.

From investment view point, MOFSL is bullish on Infosys, HCL Tech, and TCS; JM Financial is positive on Infosys, HCL Tech, and Tech M; and Phillip Capital maintains 'BUY' on TCS, Infosys, Wipro, Mindtree, Mphasis, Persistent, LTI and Coforge.