TCS, Wipro, Infosys Shares, ADR Fall: Accenture's Guidance Cut Crushes Recovery Hopes? Top IT Stocks To BUY

Indian IT stocks witnessed a frenzy selling on Friday with heavyweights like Infosys, TCS, Wipro, and HCL Tech recording deep dives. Not just that it was even their American Depositary Receipts (ADRs) that also took a massive beating on the NYSE overnight. The reason? It is Ireland-based IT giant Accenture that has trimmed its guidance for the fiscal 2024.

Now one may wonder how Accenture's guidance cut impacts Indian IT companies. Accenture's earnings and 2024 guidance are a warning shot that recovery in the technology sector is still far-fetched. The tech sector has been under pressure since the start of FY24 but escalated during Q3FY24 due to a challenging macro environment such as economic concerns, geopolitical tensions, and industry-specific conditions.

IT Stocks, ADRs Bleed:

All Indian IT stocks were in deep red, falling in the range of 1% to 3%. The bearish tone was driven by sharp selloffs in heavyweights like TCS, Infosys, Wipro, and HCL Tech. Tech Mahindra saw softer declines though.

IT Stocks:

At the time of writing, Nifty IT plunged by 662.70 points or 1.84% to trade at 35,364.10. The index has touched an intraday low of 34,701.75.

Coforge was the top bear with a drop of 2.6%. But market movers like HCL Tech, Wipro, and Infosys plunged by 2.2% to 2.3%. Persistent System was also down by over 2%, followed by L&T Group's IT twins LTIMindtree and LTTS which dipped by 1.9% each.

Further, Mphasis was down by 1.6%, and the largest IT company in India in terms of market share, Tata Consultancy Services (TCS) plummeted by over 1.2%. Lastly, Tech Mahindra fell by 0.95%.

ADRs:

As of now, there are only two ADRs of Indian IT companies listed on the NYSE. These are Infosys ADR and Wipro ADR.

Overnight, Infosys ADR was down by 3.83% to $18.20, while WIPRO ADR tumbled by 1.7% to end at $5.850.

Accenture's Earnings:

Accenture, which has a vast presence in India, announced its second-quarter earnings for fiscal 2024. And it was more of a dagger than comfort!

In the second quarter, revenues were at $15.8 billion and were flat in both U.S. dollars and local currency compared to the second quarter of fiscal 2023.

GAAP operating income was $2.05 billion, compared to $1.94 billion for the second quarter of fiscal 2023, and the operating margin was 13.0% compared to 12.3% for the second quarter of last year. New bookings for the second quarter of fiscal 2024 were $21.58 billion, a 2% decrease in both U.S. dollars and local currency from the second quarter of fiscal 2023.

For the third quarter, Accenture New bookings for the second quarter of fiscal 2024 were $21.58 billion, a 2% decrease in both U.S. dollars and local currency from the second quarter of fiscal 2023.

Further, in the fiscal 2024 year, Accenture trimmed its revenue growth to be in the range of 1% to 3% in local currency, compared to 2% to 5% previously. Accenture also cut its upper-end of margin estimates but retained its lower-end of growth.

Now, Accenture expects the GAAP operating margin for fiscal 2024 to be 14.8%, compared to a range of 14.8% to 15.0% previously, an expansion of 110 basis points from fiscal 2023.

How Does Accenture's Earnings Set Trend On What To Expect In Indian IT Companies?

Firstly, Accenture is a key peer to Indian IT companies.

In its research note, Motilal Oswal pointed out that Accenture gave weak 3Q revenue growth guidance of (1%)-3% YoY CC and lowered corresponding FY24 guidance to 1.0%-3.0% (vs. 2.0%-5.0% last quarter), both of which missed Bloomberg consensus expectations. Assuming 3Q growth near the top end, this implies a modest exit to FY24 of 6.0% YoY CC growth for ACN despite a low base and inorganic support.

Also, management commentary continues to indicate weakness in discretionary spending, partially compensated by cost efficiency-related spending, it said.

Accenture's guidance cut and management commentary hints that FY24 is likely to end on headwinds.

Motilal's note further added, " Our discussions with Indian IT peers echoed the cautious spending environment in the near term, which should drag down FY24 operational performance for them. On the other hand, outsourcing-driven deal bookings remained robust, clocking the second-highest bookings of USD21.6b in 2Q despite the high year-ago base (down 2% YoY but up 17% QoQ). "

Along similar lines, Emkay Global analysts in their note said, "ACN's management commentary and guidance cut reflect continued softness in near-term demand as clients remain cautious about spending decisions amid macro uncertainties. The guidance implies some acceleration in revenue growth in Q4 (crossing mid-single digit growth at the mid-point of the guidance) compared to flat to low single-digit growth in H1, assuming the mid-point of Q3 guidance."

Emkay further added while the ramp-up of large deal wins should aid growth in FY25 for select Indian companies, persisting weakness in discretionary spending puts our/consensus estimate of high single-digit growth for large caps at risk.

In regards to company-wise, Emkay's note added, "Infosys and HCL Tech's FY25 revenue guidance should reflect the cautious behaviour of clients in the near term. The Nifty IT index corrected 5.5% in the last 1M and underperformed broader markets by 4.6% on account of muted guidance provided by some of the global services peers for CY24. We expect ACN to cut its guidance to weigh on near-term stock performance."

Also, Kotak Institutional Equities highlighted that Accenture's further cuts in short-cycle discretionary projects, a negative for companies such as Wipro, LTIM, Mphasis and Infosys where estimates incorporate some recovery in discretionary spending.

Kotak also said, "Noting the weak near-term demand, we expect large IT services companies to start FY2025E with cautious guidance. Growth will vary considerably across companies based on mega-deal ramp-ups, vertical exposure and discretionary spending."

Lastly, Kotak's note added, "We expect a modest cut in expectations of larger companies where estimates are rationale and sharper cuts in estimates of midtier companies."

IT Stocks To Buy:

Emkay's pecking order is INFO, HCLT, TECHM, WPRO, LTIM, and TCS among Tier-1 companies. While Kotak's preferred picks in the sector are TCS, Infosys and Cyient.

Indian IT companies will start announcing their Q4 results for FY24 from early April onward. Going by the last patterns, TCS and Infosys are likely to onset the quarterly earnings season.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.