Accenture’s Earnings Imply Near-Term Pain For Indian IT Firms

Accenture Plc cut its revenue growth guidance for the ongoing quarter, indicating that the impact from global headwinds like the novel coronavirus outbreak may affect its earnings. That doesn’t bode well for Indian information technology companies.

Revenue of the New York-listed IT firm, which follows the September-August fiscal year, grew 8 percent in constant currency terms in the quarter ended February. That was at the higher end of its 5-8 percent growth that it had guided for previously.

However, the company, which has major operations in the U.S. and Europe, cut its revenue projection to 3-6 percent from 5-8 percent previously over the Covid-19 pandemic’s effects on global economic growth and trade. That implies a less than 1 percent growth for the six months through August.

Yet, Accenture has maintained its full-year operating margin guidance of 14.7-14.8 percent, which it claims, takes into account the current economic environment and could change depending on the duration of the outbreak.

What Does This Mean For Indian IT?

Near-Term Growth Concerns

Accenture said in a conference call that it expects the Covid-19 outbreak to result in curtailment or delays to technology expenditure from clients and disruption in execution of ongoing projects due to travel restrictions.

Accenture’s lowered guidance implies lowered growth expectations for Indian IT sector in the near term, Kotak Institutional Equities said in a report, adding that some pain in Indian IT revenues may be visible in the ongoing quarter ending March itself.

Morgan Stanley said Accenture’s financial services segment witnessed muted growth in the quarter. This segment is the largest vertical for Tata Consultancy Services Ltd., Infosys Ltd. and Wipro Ltd., contributing nearly of third of their revenue.

These Indian companies also have a sizeable consulting business. Accenture’s consulting business has likely been disproportionally affected compared to its outsourcing business, Morgan Stanley said.

But Not All’s Bad

Accenture’s results also indicate that it’s possible to manage delivery and transition even if a large number of teams are working from home, Kotak Institutional Equities said. “Companies with strong delivery processes and use of collaboration tools can sustain operations despite the severe nature of current stress,” the brokerage said in a report. Accenture’s earnings, the report said, can be taken as a positive for business continuity.

Nomura expects the IT major to make an “accelerated shift” towards digitisation in infrastructure management, remote working and cloud services, digitising internal processes and corporate functions. These are segments that have provided the bulk of growth for companies like HCL Technologies Ltd., TCS, Infosys, Larsen & Toubro Infotech Ltd. and Mindtree Ltd.