Disappointing Accenture Performance Dampens Indian IT Sector's FY25 Prospects

 

The poor Accenture results, in the opinion of Kotak Institutional Equities, have dashed any prospects for a turnaround in FY25. Following Accenture's downward revision of its fiscal year outlook, Morgan Stanley likewise voiced concerns on the rate of Indian IT revenue recovery.

Analysts' fears regarding the future of Indian IT companies have been heightened by Accenture's poor performance in the most recent quarter and its underwhelming projection, which could stretch into the 2024–25 fiscal year. Investors had previously been optimistic that performance would improve in the second part of the year. But Accenture's muted performance has deflated hopes, raising concerns about the IT industry's ongoing struggles in the next fiscal year.

Citing economic uncertainty, the world's top provider of IT services lowered its revenue projection for the fiscal year 2024 on March 21. This change is a result of clients cutting back on their consulting service budgets. In contrast to its previous estimate of 2 percent to 5 percent, Accenture's new outlook now predicts full-year revenue growth to range between 1 percent and 3 percent.

The poor Accenture results, in Kotak Institutional Equities' opinion, have dashed any prospects for a turnaround in FY25.

"Accenture's performance and future prospects confirm our anticipation of cautious demand in the short term. Accenture called attention to more reductions in short-cycle discretionary projects, which is detrimental for businesses like Wipro, LTIM, Mphasis, and Infosys whose projections include a recovery in discretionary spending. Given the lackluster demand in the short term, we anticipate that major providers of IT services will issue cautious guidance for FY2025E. Companies' growth will differ significantly based on their mega-deal ramp-ups, vertical exposure, and discretionary spending. When predictions are reasonable, we anticipate a little reduction in expectations for larger organizations and a more significant reduction in estimates for mid-tier enterprises. Our top picks in the industry are TCS, Infosys, and Cyient," the statement read.

The Indian IT pack had a significant reversal in response to the dismal Accenture data. All of its components were trading lower today, with the Nifty IT index falling as much as 3.6 percent in intraday trade. The Nifty, in contrast, was trading about 0.5 percent higher.

CEO Julie Sweet mentioned in a post-results investor speech that sometimes clients decide to halt discretionary spending since service charges are more than software license fees. She clarified, "In uncertain macro environments, discretionary spending is reined in, prioritizing essential transformations over non-essential ones." Accenture reported that discretionary spending on smaller projects is becoming more restricted, with clients choosing cost-optimization projects in the face of uncertain macroeconomic, political, and industry-specific conditions.

In addition to Kotak, several other brokerages shared the gloomy outlook for FY25.

Concerns regarding the rate of revenue recovery for Indian IT were also raised by Morgan Stanley in response to Accenture's cautious remark and downward revision of its fiscal year guidance. The firm continues to believe that the rate of recovery would be slower than expected, which might put FY25 revenue projections at risk.

Similar thoughts were expressed by CLSA, which pointed out that Accenture's steep downward revision indicates no notable improvement in the second half of FY24. Despite the fact that present values do not reflect the current earnings downgrade cycle in the domestic IT industry, the brokerage is nonetheless apprehensive about it.

Nomura continued to take a cautious approach, emphasizing the lack of a rebound in discretionary expenditure. For Tech Mahindra in the large-cap market and Coforge, Birlasoft, and eClerx in the mid-cap market, the brokerage confirmed its "buy" recommendation. It does, however, maintain a negative view for TCS, Wipro, LTIMindtree, L&T Tech, and Mphasis, citing the absence of a macroeconomically driven rebound in client discretionary spending.

Domestic real estate Emkay further emphasized that further downturn in near-term demand is a result of customer prudence amid macroeconomic uncertainty, as indicated by Accenture's management commentary and guidance modification. Revisions to the guidance point to a possible acceleration in revenue growth in Q4, as opposed to H1's flat to low single-digit growth.

The increase in big contract wins might help some Indian companies expand in FY25, but Emkay thinks the high single-digit growth predictions for large caps are in danger due to ongoing weakness in discretionary expenditure. It believes that in the near future, customer caution will be reflected in Infosys and HCL Tech's FY25 revenue projection.

The Nifty IT index saw a 5.5 percent correction last month, trailing the overall markets by 4.6 percent. This was mostly because certain global services counterparts provided more cautious outlook for CY24. Emkay anticipates a negative short-term impact on stock performance from Accenture's guidance decrease.

In terms of Indian IT companies, Infosys, HCL Tech, Tech Mahindra, Wipro, LTI Mindtree, and TCS are ranked as Tier-1 companies by Emkay.

Notice: asadtechies does not endorse the opinions or suggestions expressed above; rather, they represent the opinions of certain analysts or broking firms. Before making any financial decisions, we suggest investors to consult with qualified specialists.