Accenture's strong Q1FY21 results make analysts bullish on Indian IT stocks

The information technology (IT) space was outperforming the benchmarks in trade on Friday, a day after Ireland-based Accenture reported strong earnings for quarter ended November 30 (Q1FY21) and revised upwards revenue growth forecast for full fiscal year of 2021 to 4 – 6 per cent from an earlier estimate of 2 – 5 per cent.

At the index level, the Nifty IT index hit a record high of 23,408, up 2 per cent on the NSE in intraday trade. In comparison, the benchmark Nifty50 index was down 0.5 per cent at 13,676. Individually, sector giants Tata Consultancy Services (TCS) and Infosys hit their respective record highs. Besides, Coforge, Larsen & Toubro Infotech, HCL Technologies, Wipro and Tech Mahindra were up in the range of 1 per cent to 3 per cent.

With the global IT behemoth reporting sharp uptick in outsourcing business, and broad-based recovery across verticals and markets, here is how analysts read through the numbers and what it means for the Indian IT sector

Earnings beat Wall Street estimates: Analysts at Emkay Global point out that the company clocked broad-based improvement across industries, services and geographic markets, which resulted in an all-round beat in the overall operating performance and strong order booking.

Accenture's revenue for the quarter, at $11.8 billion and up 4 per cent on a year-on-year (YoY) basis, was ahead of its guidance of -3 per cent to flat YoY growth in constant currency terms.

Health and public services (up 11 per cent YoY) remained the best performing vertical, coupled with revenues from financial services and communications that recovered sharply. The revenue decline in highly impacted verticals like travel, energy, Hi-Tech, Retail and Industrial moderated on a sequential basis but remained in double-digits.

Outsourcing drives growth: Revenue in the vertical grew 8 per cent YoY in constant currency (CC) terms and drove overall revenue. The management highlighted that new bookings remained healthy and grew 25 per cent YoY to $13 billion driven by 46 per cent YoY jump in outsourcing bookings to $6.3 billion.

This segment, analysts at Kotak Institutional Equities believe, will augur well for the Indian IT players but only when they know "how well they can capture myriad opportunities from accelerated cloud adoption of enterprises".

"TCS and Infosys have a comprehensive portfolio of services and are best positioned to participate in the opportunity. Other companies will have a play in individual layers. L&T Infotech is better positioned among mid-tier players," it said in a December 18 note.

Cloud takes centre-stage: Robust growth in outsourcing business was a result of strong traction in Cloud and related services. The Irish firm now expects services around Cloud (generating nearly 30 per cent of revenue) to grow in double-digits, driving performance going forward. That said, the management sounded caution on the supply front, suggesting there is a scarcity of Cloud talent in the market.

Akshat Agarwal and Ankur Pant, analysts at Jefferies, say that tier-I Indian IT firms are favorably positioned to leverage Accenture's accelerated spends on cloud, security and digital. Accenture’s expectation of growth recovery from 2HFY21 is fairly aligned with the brokerage’s expectations for tier-I Indian IT firms and bets on Infosys as the most preferred pick.

Acquisitions: Accenture completed 10 acquisitions in Q1FY21 in strategic areas such as cloud, intelligent operations and Industry X.0. It also spent $500 million on acquisitions in Q1FY21 and expects to invest $1.7 billion for acquisitions in FY2021. Overall, the management expects 2 per cent inorganic growth in FY2021. As per management estimates, the company grew nearly 4x faster than the market on a trailing 12-month basis. It expects revenue growth to return to the pre-Covid-19 trajectory in H2FY21.

FY21 guidance: Accenture has raised its revenue growth guidance to 4–6 per cent in local currency compared with 2–5 per cent previously, including a negative 1 percentage point from decline in reimbursable travel costs for FY21. The company expects operating margin for the full fiscal year to be 14.8–15.0 per cent, an expansion of 10–30bp from fiscal 2020. Besides, for Q2FY21, Accenture expects to clock revenue of $11.55 billion–$11.95 billion, a 1–4 per cent growth in local currency.

Given this, Edelweiss Securities says that the robust tech up-cycle would benefit firms like HCL Technologies, Infosys, TCS, and Tech Mahindra among large-caps and Mindtree, LTI, LTTS, Persistent, and eClerx among mid- and small-caps.

“The management commentary indicates an improving growth trajectory and expects H2FY21 to grow in the high single to low double-digits, aided partially by an improving macroeconomic environment. We see this as positive for Indian IT Services companies as well,” said a note by Motilal Oswal Financial Services.