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Accenture Q2FY21 earnings: Five ways in which it can impact Indian IT

Topics Accenture | IT stocks | Markets

Accenture posted revenue growth of 5 per cent year-on-year (YoY) in constant currency (CC) terms which was higher than its guided range of 1-4 per cent
Shares of most information technology (IT) companies reversed losses and were trading on a firm note on Friday, taking strength from a strong show put up by Accenture in the second quarter of the financial year 2021 (FY21). While Accenture's robust results bode well for the technology companies, a broad-based weakness in the markets kept a few index heavyweights under pressure.

After hitting a low of 25,028 earlier in the day, the Nifty IT index was trading 0.10 per cent higher at around 11 am. That said, Tata Consultancy Services, Infosys, Wipro and Tech Mahindra were down up to 1 per cent.

Accenture's revenue beat, bookings at historically high and improvement in demand trends even in stressed verticals were among the key highlights from Accenture's Q2 show which analysts believe could lend optimism to the 4QFY21 performance of Indian techs.

Here's how top brokerages interpreted the results and what it means for Indian IT firms:

Revenue ahead of guidance
Accenture posted revenue growth of 5 per cent year-on-year (YoY) in constant currency (CC) terms which was higher than its guided range of 1-4 per cent. The growth was driven by TMT (technology, entertainment & media and telecom), BFSI (Banking, financial services and insurance), and healthcare and Public service verticals. While retail and manufacturing vertical returned to positive growth, resources continued to be a drag on the growth (worse than Q1FY21, but the company sees improvement in Q3FY21).

"There is a strong correlation between Accenture’s revenue growth and the revenue growth of Top-4 Indian IT services firms (though with a one-quarter lag). Hence, the pick-up in Accenture’s revenue growth and strong bookings reaffirms our view that the IT services sector has entered a technology up-cycle," says Vikas Ahuja and Krati Sankhlech, research analysts at Credit Suisse.

New bookings hit record high
Accenture highlighted that demand was stronger than its expectations, driving a 13 per cent YoY growth in new bookings to $16 billion - their highest-ever while cloud and security vertical witnessed strong double-digit growth.

Analysts at Jefferies believe Accenture’s Q2FY21 performance reinforces confidence in continued spends on cloud, security and digital transformation which are key medium-term growth drivers for Indian IT firms. Tier-I Indian IT firms, they say, are favourably positioned to leverage these growth opportunities.

Outsourcing growth strongest in 6 years
The outsourcing segment was a standout for Accenture as it grew 11 per cent YoY in CC terms, the highest growth since Q2FY15. The company now expects double-digit growth for the segment in H2FY21 which, Nomura notes, bodes well for Indian IT firms as outsourcing is a significant segment for them.

"The outsourcing book/bill ratio at 1.4x continues to trend above long term historical average, and we believe this could reflect in strong order bookings for the Indian techs as well," JM Financial said in a note.

Revenue guidance raised
The company has again revised up its full-year (FY21) guidance to 6.5-8.5 per cent from the guidance of 4-6 per cent in Q1FY21. The management highlighted that guidance increase is largely a function of the improved business outlook with cloud and digitalisation presenting strong growth opportunity. 

"Strong revenue growth along with a revision of FY21 growth outlook should lend confidence to the growth resilience for Indian techs going into FY22," JM Financial added.

Impact on utilisation
Utilisation continued to be high for Accenture at 94 per cent as against 93 per cent in the last quarter. While attrition inched up to 12 per cent from 9 per cent in Q1FY21, it still is below the historical levels.

Moreover, the company has planned for an extra round of promotions. On the cost side, it is a key concern for the industry as higher employee cost would put pressure on profitability, Motilal Oswal Financial Services pointed out. 

The higher utilisation and lower attritions are in line with those witnessed for the Indian techs in general. Analysts at JM Financial, however, expect the utilisation to inch lower for the industry as hiring picks up and attrition increases.

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