Accenture just gave an ominous sign for Indian IT stocks

NEW DELHI: After a terrible 2022 which left IT stocks as the worst performers on Dalal Street, things are not looking bright for investors in the new year, too, as US tech major Accenture signalled a slowdown in discretionary spending and did not increase its FY23 revenue guidance.

Accenture reported a 15% growth in constant currency (CC) terms in the November 2022 quarter, above the guided range of 10-14%. Its implied H2 FY23 growth guidance of 5.6-9.6% YoY cc vs. 25% YoY cc in H2 FY22 suggests a sharp revenue growth moderation for Indian IT in FY24, Jefferies said.

The global brokerage said there are three key takeaways for Indian IT firms from Accenture’s results:

1) Rising caution among clients with focus on cost optimization suggests sharp moderation in growth for IT services in FY24. This is evident from Accenture’s implied 2HFY23 revenue growth guidance of 5.6-9.6% YoY cc (vs 25% YoY cc in 2HFY22).

2) Increasing client focus on larger cost optimization deals and slowdown in smaller deals position larger IT firms more favorably than mid/small sized firms.

3) A cooling off of the job market, lower attrition and more prudent hiring are likely to lower support margins, but wage inflation remains high.

Nomura analyst Abhishek Bhandari said the consensus revenue growth estimates for FY24 may see downward revisions. While retaining its cautious stance on the sector, he said the brokerage remains concerned about the demand outlook for Indian IT services and expects a ~470bp lower revenue growth (at 8% YoY) in FY24F vs FY23F.

Kotak Institutional Equities said Accenture results reinforce what was known earlier — the impact of a deteriorating macro is feeding its way into discretionary spending, while cost take-out focus will lead to uptick in managed services.

“We believe that slowdown in growth rates is also baked into stock prices. We expect growth rates of 5-8% in FY2024E, down from 11-16% in FY2023E for Tier 1. A deeper recession has implications on multiples and is not fully priced in,” Kotak said.

What should investors do?

has, however, maintained its positive stance on the sector as it expects good demand over the medium term and strong margin recovery.

,

, and

remain its preferred picks within the Tier-I IT space.

Nomura, Nirmal Bang and

also prefer largecaps over midcaps.

On a risk-reward framework, Kotak finds Infosys,

and

attractive.

Pointing out that Nifty IT is trading at a 14% premium to Nifty vs 10-year average premium of 8%, Jefferies has taken a cautious stance on the sector. Infosys is the only IT stock that it has a buy rating on with a target price of Rs 1,710. It expects

, LTIMindtree and

to underperform.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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