Sector Update | 28 March 2019
Technology
Momentum intact – Takeaways from Accenture’s commentary
Growth in outsourcing – a positive from Indian IT’s perspective
Appended below are key thoughts on the industry impressed on us following
Accenture’s 2QFY19 results and commentary:
Demand trends holding up well…:
Accenture’s (ACN) revenue growth (+9% YoY
CC v/s 9.5% in 1QFY19) and particularly order bookings in 2QFY19 are indicative
of the sustained demand trends. Consulting order bookings registered book-to-
bill of 1.2 while that for outsourcing deal bookings was 1.1x.
…but potential macro risks may impact ‘run the business’ spend, and not
digital:
On the back of the 1HFY19 performance (9% YoY CC, 7.5% organic), the
upper end of the company’s full-year guidance is raised to 8.5% (7% organic).
ACN had been citing the potential for some slowdown in overall economic
growth toward the latter half of 2019. While that has not changed, volatility has
been the new normal for several years. The pace of disruption in client-
industries implies that companies cannot hit the pause button on the new, but
can certainly double down on the cost-rationalization agenda.
Outsourcing growth is a positive:
Outsourcing grew 9% YoY CC, catching up with
Consulting after six quarters. This bodes well for demand, not just in Digital but
also in run-the-business services.
BFSI – set to align with industry:
Accenture had cited its expectation of
improved BFSI growth in 2HFY19. While 2QFY19 growth was 2% YoY CC, the
confidence for that outlook remains intact and is supported by order bookings in
the recent period. India-based peers such TCS and INFO have seen an improved
performance over the past 2-3 quarters, leaving CTSH to recover its growth in
the vertical.
2QFY19 performance highlights
Revenue 2% ahead of consensus
Accenture’s 2QFY19 revenue grew 9% YoY CC to USD10.5b, exceeding the
consensus estimate of USD10.3b by 2% and marginally higher than its guidance
of USD10.1-10.4b.
Growth in both
Consulting
and
Outsourcing
stood at 9% YoY CC.
New bookings
stood at USD11.8b v/s INR10.3b in the previous quarter.
Consulting new bookings stood at USD6.7b (57% of total bookings).
Operating margin
of 13.3% was in line with consensus.
BFSI soft; traction in growth markets remains strong
BFSI grew 2% YoY CC. Communications, Media & Technology grew 12% YoY CC.
Revenue from North America increased 8% YoY CC, while that from Europe grew
7% YoY CC. Growth markets grew 16% YoY CC, after +17% in 1QFY19.
Ashish Chopra – Research Analyst
(Ashish.Chopra@MotilalOswal.com); +91 22 61291530
Anmol Garg – Research Analyst
(Anmol.Garg@motilaloswal.com); +91 22 6129 1574
28 March 2019
are
Investors
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advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Technology
Exhibit 1:
Slight relief in BFSI led by double-digit growth in Insurance
CMT
25%
20%
15%
10%
5%
0%
12%
10%
3%
2%
BFSI
HPS
Products
Resources
22%
Source: Company, MOFSL
Guidance raised by 50bp
The company raised its full-year guidance band by 50bp to 6.5-8.5%. ACN
expects the operating margin for the full year to be in the range of 14.5-14.7%
(+10-30bp from FY18). Consensus margin estimate stands at 14.6%.
Acquisitions are expected to contribute ~1.5pp to growth, implying organic
growth estimate of 5%-7% YoY CC.
For
3QFY19,
ACN guided for revenues of USD10.8-11.1b, implying growth of 5.5-
8.5% YoY CC. Consensus estimate stands at USD11.06b – in the upper half of the
guided band.
Organic growth was above 8% YoY CC, and acquisitions contributed slightly less
than 1.5% during the quarter.
Operating margin at 15.4% was in line with consensus.
Exhibit 3:
… with growth led by Consulting
11.8
15.6%
3.4
Consulting (USD B)
Outsourcing (USD B)
5.8
Exhibit 2:
Net new bookings continue inching up
New Bookings (USD B)
9.2
10.1%
-7.5%
9.8
10.1 10.0 10.3
11.8
14.6%
6.7%
3.3%
-1.1%
2.7%
-7.8%
-5.9%
YoY Growth
10.8 10.2
8.3
4.6
4.6
4.6
5.2
5.0
5.1
4.1
5.9
4.6
5.7
4.7
6.1
4.3
5.9
5.1
6.7
4.9
5.9
Source: Company, MOFSL
Source: Company, MOFSL
28 March 2019
2
 Motilal Oswal Financial Services
Technology
Key takeaways from management commentary
Improvement expected in BFSI:
The segment has been subdued for some time
now. This quarter saw some acceleration, led by double-digit growth in
Insurance, partially offset by a contraction in BFS. ACN will see some uptick in
2H on account of higher bookings in BFSI this quarter.
Macro caution, but expect Digital spending to continue:
While traction
continues for now, ACN's guidance continues to bake in impact from potential
slowdown of global economy. Despite uncertainties, clients are focusing on
digitizing the business, amid face pace of disruption. Client budgets continue
growing but at a slightly lower clip. In the event of a slowdown, clients may
accelerate the optimization of “run” spends
Slowdown in Healthcare and Public Services should abate:
HPS continues to be
under pressure due to slowdown in deal momentum from the federal
government. 2Q saw a total impact of 2% in growth from the HPS business. This,
however, is seen improving gradually, going forward.
Move towards higher pricing:
ACN continues investing in areas that can
demand a premium pricing. This has been the key driver of improving revenue
productivity.
Digital – cannot be calibrated as discretionary:
ACN saw 65% of total bookings
in the digital space. Clients continue spending in digital platforms as there is a
lot of scope for transformation, which is a survival imperative. Digital adoption is
still a long runway, and thus, growth momentum will continue in the near-to-
medium term.
Going strong in growth markets:
ACN saw 16% growth in ROW, led by strong
traction in Japan, Brazil and China. ROW now constitutes 20% of total revenue.
The traction in this segment is expected to continue going forward.
28 March 2019
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Technology
NOTES
28 March 2019
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