Sector Update | 25 June 2020
Accenture – Encouraging tone to kick off earnings season
Positive and negative read-through for Indian IT sector
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Stronger-than-expected results/commentary of Accenture sets an encouraging
tone for the impending earnings season for Indian IT. This time, Accenture’s
3QFY20 comprising Mar-May’20 (MAM) is the most severely disrupted due to
the COVID-19 pandemic. Despite this, the impressive performance and new deal
bookings epitomize the resilience and adaptability of Accenture’s business
model. Healthy growth in Italy (8% YoY, CC) bears testimony to this.
The company’s FY20 growth guidance at end of 2QFY20 (3-6% YoY, CC) came in
a tad earlier than the announcement of lockdowns across a significant part of
the globe (refer
our earlier note).
Thus, the street anticipating big miss for the
quarter and significant downgrade for FY20 guidance was a natural occurrence.
However, Accenture’s growth during 3QFY20 (higher end of the guidance band)
and narrowing of the earlier guidance band (3.5-4.5% YoY, CC) is a key positive
read-through for the sector.
More relevant to Indian IT is the trend in outsourcing revenue, which grew 5%
YoY (v/s overall growth of 1.3% YoY, CC). Even new bookings in the outsourcing
segment witnessed strong increase (8% YoY, CC) with most sales and signings
happening virtually. Management indicated that the pipeline for 4Q is very
robust and should translate into robust bookings in the next quarter.
Despite the lockdowns and shift to Work from Home (WFH), drop in utilization
(300bp QoQ to 88%) was not damaging. Operating margin expansion (220bp
QoQ; 10bp YoY) should also calm the nerves of Indian IT investors on concerns
around meaningful margin displacement due to factors like pricing pressure, etc.
While most trends are positive takeaways for Indian IT, we are also cognizant of
the fact that Health & Public Services (12% YoY, CC) vertical was the biggest
growth driver given the sharp increase in projects like the COVID-19 contact
tracing apps, etc. It should be noted that Healthcare vertical for Indian IT players
(TCS – 8%, Infosys – 6%, Wipro – 13%, HCLT – 13%) is not as big as that of
Accenture (18% of revenue). In addition, growth markets (20% of revenue)
remained a key growth driver for Accenture, which again is not a big and reliable
segment for Indian companies. Accordingly, we maintain a cautious stance on
extrapolating the positivity in its entirety for Indian companies.
Even as management indicated that WFH is proving to be more efficient in some
cases, they also hinted at some challenges in ER&D for people to collaborate.
We foresee similar roadblocks for Indian companies with high exposure to ER&D
(e.g. HCLT, Wipro, LTTS, Cyient, etc.).
Highlights from management commentary
The company had strong momentum in March. However, the pandemic led to
clients delaying decisions and deferring work during April and May.
Nevertheless, Accenture informed there is no increase in project cancellations.
Accenture alluded to improvement in overall business environment with more
client engagements happening.
Sudheer Guntupalli – Research analyst
(Sudheer.Guntupalli@MotilalOswal.com); +91 22 5036 2749
Research analyst: Mohit Sharma
(Mohit.Sharma@MotilalOswal.com); +91226129 1531/
(Heenal.Gada@MotilalOswal.com); +91225036 2654
Investors are advised to refer through important disclosures made at the last page of the Research Report.
25 June 2020
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.