Sector Update | Technology
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Demand remains robust; sanguine commentary by Accenture
BFS is strengthening, contrary to peers’ citation of weakening pockets
Accenture’s 3QFY19 performance was steady on the revenue growth front; and
though order bookings were on the softer side, the company has ruled out any
demand concerns. Key insights highlighted below:
Improvement in BFSI, in line with past commentary:
For some time now, the
BFSI segment has been subdued for Accenture. As indicated in earlier quarters,
3QFY19 performance was led by double-digit growth in Insurance and revival in
BFS (double-digit increase in growth markets and healthy performance in North
America). Europe BFS continued to contract. 4QFY19 is expected to witness
continued improvement in performance, which, although on a low base, is in
contrast to peers’ commentary of weak pockets within the vertical (cited by TCS,
INFO, WPRO and CTSH).
Strong demand environment:
ACN stressed that it remains excited about the
demand environment, and the same is reflected in its revenue growth. Though
3QFY19 bookings were weak due to inherent volatility and lumpy nature on a
QoQ basis, it is not a sign of any demand weakness. Deal visibility is strong and
bookings in 4QFY19 should improve; 65% of the bookings were from the ‘New’,
which includes Digital, Cloud and Security. ACN also highlighted that in the
future, IT Services’ companies may witness traction in non-linear revenue
growth as the market moves towards platform-based and intelligent services.
Outsourcing growth – a relevant positive for Indian IT:
Outsourcing grew 10%
YoY CC v/s Consulting, which grew 7% YoY CC. ACN expects high-single-digit
growth in the near term for both Consulting and Outsourcing.
GPM improvement – aided primarily by pricing:
ACN continues to invest in
areas that can demand premium pricing. This has been one of the key levers for
improvement in gross margins. Also, realization rates in recent quarters seem to
have stabilized for India-origin providers, as a function of the business mix.
M&A – a key proposition in the business model:
ACN has spent USD1.1b on
M&A, acquiring various companies with the ‘New’ offerings, with focus on
Digital agencies. ACN expects USD1.3b spending on M&A related activities, with
inorganic revenue contributing ~2pp to FY19 growth.
Accenture’s performance and comments reinforce our stance that the
demand trends, order book and deal velocity hint at sanguine FY20E revenue
growth for the sector. Pockets of weak BFS may drive marginal, but not
meaningful deceleration. As we cited in our recent note, it is margins that pose a
risk to earnings growth this fiscal and 1QFY20 performance may drive some
– Research analyst
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Research Analyst: Anmol Garg
(Anmol.Garg@MotilalOswal.com); +91 22 7193 4271 /
27 July 2019
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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