Accenture earnings: IT investors should wake up and smell the coffee

The earnings of Accenture, which follows a September-August financial year, are often seen as an indicator of future performance of large Indian IT companies. And the Q2FY24 earnings bring anything but good news.

Sequential constant currency revenue growth, as expected, was muted in the quarter. But what came as a rude shock was the tightening of clients’ IT budgets that forced Accenture to cut its FY24 local currency revenue growth guidance to 1-3% from 2-5%. Accenture sees smaller projects particularly being affected.

Reacting to the guidance cut, shares of Accenture, which is listed on the Nasdaq, declined 9% on Thursday. 

“Accenture barely cuts guidance. Barring covid period, last time Accenture reduced the lower end of its guidance was in Q3FY13. That suggests the uncertainty in the spending environment remains at decadal high,” pointed out analysts at JM Financial Institutional Securities Ltd.

Reflecting the pain, new order bookings at $21.6 billion were down 2% year-on-year. The book-to-bill ratio stood at 1.37x in Q2 versus 1.39x same period last year. In US dollar terms, bookings in consulting and managed services declined 1% and 3%, respectively.

The management commentary adds to the discomfort. Accenture expects flattish revenue growth in consulting and mid-single-digit growth in managed services (outsourcing) in FY24. 

Accenture competes with tier-1 Indian IT companies in the managed services segment. The root cause of the sustained pain remains client caution on discretionary IT spending amid macro-economic and political uncertainties. So, clients continue to prioritize cost take-out projects that generate near-term return on investment.

Amid this challenging environment, the company’s thrust to drive earnings is on inorganic growth. “Its revenue growth guidance now includes inorganic contribution approaching 3% in FY24E (versus 2%+ contribution expected earlier). This implies a higher cut in organic growth to now -2% to 0% year-on-year versus 0% to +3% year-on-year earlier,” pointed out Nomura Financial Advisory and Securities (India).

The road to revenue recovery for Indian IT companies seems weary as Accenture’s guidance cut could mean a weaker start to FY25. On Friday, the Nifty IT index was down 2% in early trade. The jitters indicate that the Street may now have to brace for earnings downgrades.

“Some global peers such as Capgemini, Cognizant, Tietoevery and Globant are guiding for a modestly weaker growth in 2024 versus 2023 even after assuming a pick-up in H2CY24. With Accenture’s cautious commentary added to the above set, the 4-7% revenue growth guidance range we have assumed for Infosys and HCL Technologies for FY25 may be at risk,” said analysts at Nirmal Bang Institutional Equities.

Interestingly, the upmove in the Nifty IT index seen over the past six months was attributed to the narrative of interest rate cuts by the US Federal Reserve. The easing of the monetary policy cycle was seen as a trigger for BFSI clients to raise their IT spends. But prevailing client caution indicates that confidence may take longer than anticipated to restore. 

The upcoming US elections, with Donald Trump as one of the candidates could also keep IT investors nervous. Recall that in Trump’s first presidential term in 2016 worries over H-1B visas had put IT companies in a spot. While Indian IT companies have significantly cut exposure to H-1B visas, uncertainty over policies may remain till the election is over.