IT Stocks to Buy: Analysts believe Accenture’s strong outsourcing performance is positive for Indian IT peer
Infosys vs TCS vs HCL Tech vs Wipro: Indian IT stocks gained upto 2 per cent on Friday despite Accenture lowering its forecasts for annual revenue and profit and announcing about 19,000 job cuts. Although, analysts believe Accenture’s strong outsourcing performance is positive for Indian IT peer.
Accenture has trimmed its top end of FY23 revenue constant currency (CC) revenue growth guidance to 8-10 per cent from 8-11 per cent, which was lower than what Dalal Street had been building in. It reported $15.81 billion of revenue for the second quarter — up 9 per cent YoY in CC terms, which was towards the top end of its guidance band of 6-10 per cent. Order booking was strong in managed services segment, but a bit soft in consulting, analysts said adding that the muted commentary on workforce growth was a only sore spot.
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Post Accenture’s quarterly numbers and guidance, Dalal Street analysts are preferring large cap IT stocks such as Infosys and Tech Mahindra (TechM) over smaller peers. Their views vary, however, with some analysts still remaining cautious on the sector outlook.
“Increasing client focus on larger deals and slowdown in smaller deals position larger IT firms more favorably than mid/small sized firms,” Jefferies analysts Akshat Agarwal and Ankur Pant said.
Accenture is usually seen as a bellwether for the global IT sector, and analysts gauge the prospects for the Indian IT sector based on the global firm’s commentary and business outlook.
Nomura India said it remains concerned on the demand outlook for Indian IT services and expect 300 bps slower revenue growth (at 8.2 per cent YoY) in FY24 against FY23 estimates for large-caps. It expects operating performance to vary significantly across companies in FY24. Its top IT picks includes Infosys and TechM in large cap, and Coforge and Persistent Systems in the mid cap space.
Accenture’s revenue growth and cut in guidance are both better than expectations, said Nuvama Institutional Equities. “At the beginning of FY23, Accenture expected the Consulting segment to grow in high-to-mid-single digit, but now it expects consulting to grow in mid-single digit. Conversely, despite macro headwinds, Outsourcing is expected to grow in double-digit (as guided earlier) as demand continues to be resilient since clients continue to invest in tech to improve efficiency and drive transformation,” it said.
Emkay Global has Infosys, Wipro, Tech Mahindra, HCL Tech and TCS as its pecking order in the tier-1 space.
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Accenture’s revenue, it said, was closer to the upper end of its guidance, although it came in short of the outperformance seen over the last few quarters.
Accenture retained the mid-point of its organic revenue growth guidance for FY23 (6-8 per cent against earlier 5.5-8.5 per cent. The consulting business has seen moderation in both deal intake and revenue growth, but managed services sustained its strong growth momentum, Emkay said.
“Deal booking remained strong in Q2 driven by large transformational deals, while clients are turning cautious amid macro uncertainties, leading to delay in decision-making and pause in smaller deals,” it said adding that demand still remains resilient and should alleviate any concerns of a sharp fall.
The brokerage prefers large-caps over mid-caps, considering shift in the deal-mix and relative valuations.
On layoffs, Motilal Oswal said, Accenture is purposefully trimming its headcount to mitigate (given the utilisation is stabilised at 91 per cent) the compounding inflationary impact and to streamline its operations to have better control on margins.
“Accenture delivered record-high bookings during the quarter. At the same time, it has announced headcount cuts and indicated muted hiring for 3QFY23, which is negative. The management commentary indicates consistent demand momentum despite weak macro. We maintain our positive stance on the sector as we expect good demand over the medium term and a strong margin recovery. TCS, HCL Tech, andInfosys remain our preferred picks in the Tier I IT space,” it said.
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