Accenture's guidance cut likely to weigh on Indian IT sector: Analysts

Companies likely heading to a slow start in FY25 as clients hold on to spending, they say

Accenture cutting its full-year revenue growth guidance to 1-3 per cent from the earlier 2-5 per cent marks the mood in the Indian information technology (IT) industry, according to analysts.

Analysts and industry players hoped the industry would expand in FY25, but companies appear to be holding on to spending. That is the hint analysts get with Accenture cutting its revenue growth guidance along with soft growth in managed services.

The concern is valid as the company’s revenue guidance includes inorganic contribution, which is expected to be 3 per cent. Accenture has acquired 23 companies in the first half of this financial year for $2.9 billion.

 

“We believe discretionary demand is unlikely to recover meaningfully in 1HFY25F [first half of FY5, forecast] for India IT, and maintain our cautious stance. While revenue growth for large-caps should improve in FY25F (+6.0% y-y) vs FY24F (+1.5% y-y), we expect it to be driven by cost take-out deals,” said a report by Nomura.

A recent ICRA report said growth for Indian IT services for FY25 will be in the 3-5 per cent range, or similar to what the agency has predicted for FY24.

Accenture’s Q3 results also show that though Generative AI (GenAI) deals are being awarded, it is coming at the cost of other deals. In Q3, Accenture booked more than $600 million deals in GenAI to take the total to $1.1 billion in the first-half of the fiscal.

“Strong pick-up in GenAI bookings has not meant better discretionary spending. Cuts in other parts of discretionary spending have been used to fund generative AI experimentation budget,” said a report by Kawaljeet Saluja, Sathishkumar S and Vamshi Krishna of Kotak Institutional Equities.

Some other parameters continue to show softness and will likely impact the Indian IT sector. For instance, North America was flat sequentially and Europe, the Middle East and Africa (EMEA) region was down 2 per cent. Over the past two to three quarters, growth at top IT firms was driven by Europe.

Accenture reported a fall of 6 per cent in revenue from financial services in Q3. Banking, financial services and insurance (BFSI), which is the largest vertical for all top IT players, has been slow in the last two quarters.

Accenture’s management said its clients are grappling with uncertain demand. “Our clients are navigating an uncertain macro-environment due to economic, geopolitical and industry-specific conditions. And in response, we are seeing them thoughtfully prioritise larger transformations, building out their digital core to partnering, to improve productivity, to free-up more investment capacity to focus on growth and other initiatives with near-term ROI,” said Julie Sweet, chair and chief executive officer of Accenture during an analyst call after Q3 results.

For Indian companies, Accenture’s numbers hint towards a slower beginning for FY25. “We expect large IT services companies to start FY2025E with cautious guidance. Growth will vary considerably across companies on the basis of mega-deal ramp-ups, vertical exposure and discretionary spending. We expect modest cuts in expectations of larger companies where estimates are rationale and sharper cuts in estimates of mid-tier companies,” said the Kotak report.