What, Does Accenture's Underwhelming Guidance Mean For Indian IT Players In H2FY24 And FY25?

One of the largest IT firms in the world, Accenture expects revenue growth for the financial year 2024 to be below markets estimates, while warning about a weaker IT spending in the coming quarters. This underwhelming FY24 guidance by Accenture has now crushed hopes for a recovery for Indian IT companies during the second half of the fiscal. This has also risked domestic tech player's revenue growth estimates for the next fiscal.

Accenture expects revenues to be in the range of $15.85 billion to $16.45 billion for the first quarter of 2024, or -2% to 2% in local currency, reflecting the company's assumption of a positive 2.5% foreign-exchange impact compared with the first quarter of fiscal 2023. This is below the forecast of $16.43 billion revenue by analysts poll led by LSEG.

For the full-year, Accenture expects revenue growth to be in the range of 2% to 5% in local currency.

In its note, Nomura said, "We note that the guidance for FY24E is lower than pre-Covid levels of 5-8% for FY17-20. Accenture noted that, while the long term technology spending trends remain intact, client caution due to macro uncertainties is weighing on tech spending in the near term. Clients continue to prioritise cost take out projects and discretionary demand remains weak."

Meanwhile, calling Accenture's guidance as underwhelming, JM Financial in its note said, "ACN has not built any improvement in discretionary environment through FY24. Management mentioned that clients are still cautious around macro which is impacting pace of spending, now even in some of the larger programs. We estimate that ACN's full year guidance implies a growth of 3-6% YoY over 2Q-4QFY24. However, on an organic basis, the implied growth is a more modest 1-3% (JMFe). Like in any other year-beginning, ACN sees visibility into the second half less certain at this stage."

Furthermore, Accenture expects bookings in 1QFY24 to be higher than 1QFY23's. Accenture's deal booking moderated in the fourth quarter of FY23, with new bookings of $16.6 billion down by 10% YoY given continued weakness in the number of smaller-duration projects.

Apart from this, Nomura's note also highlighted that Accenture noted while the GenAI opportunity is maturing rapidly, it will take a few quarters before the extent and pace of GenAI adoption becomes clear. It reported total deal wins of pure GenAI related projects to be at $300 million (with 200 million worth deal wins in 4Q) from 300 enterprises across industries, as clients continue to experiment on the new technology."

Accordingly, Accenture took note that implementation of GenAI is complicated and requires a digital core with cloud, matured data and modern ERP.

What does Accenture's FY24 guidance mean to Indian IT players?

In JM Financial's view, Accenture's weak 1QFY24 guidance pushes out hopes of a second half recovery (Y/E March) for India IT Services players, in our view. Besides, a modest implied growth rate through 2HFY24 for ACN risks India IT Services players' FY25 revenue growth estimates as well.

Adding the brokerage said, " This, we believe, is an incremental negative. A broadbased weak outlook for CMT is negative for TECHM. Continued weakness in North America's BFSI and Hi-tech, though not surprising, indicate demand has not bottomed yet."

"ACN's commentary that weaker macro is taking its toll on the pace of spending of even the larger programs could mean that large deal ramp-ups could take even longer, further impacting revenue growth. We remain cautious. Some reversal in NIFTY-IT, after a 14% up-move over past six months, is in order," JM Financial's note said.

Moreover, Nomura's note added, "We believe that discretionary demand is unlikely to recover meaningfully in 2HFY24F and possibly, FY25F for the India IT industry, and maintain our cautious stance. While growth for large-cap Indian IT should improve in FY25F (8.2% y-y) vs FY24F (3.2% y-y), we expect it to be driven by cost take out deals," adding, "We expect operating performance to vary significantly across companies in FY24-25F. Top picks: CTSH and TechM in large-caps, Coforge and BSOFT in mid-caps (all Buys). Maintain Reduce on TCS (in large-caps)."

During the June 2023 quarterly results announcement, the second largest IT firm, Infosys nearly halved its FY24 revenue guidance was revised to 1.0%-3.5% from earlier 4-7% owing to an increasingly challenging demand environment.

Peers like TCS, Wipro and HCL Tech, meanwhile, showed cautious in FY24 guidance. TCS revised its FY24 revenue guidance to 5% in July against the earlier 7% guidance. Similarly, Wipro expects constant currency revenue from its IT services business segment to range from $2,722 million to $2,805 million in FY24, which indicates a 2% drop or 1% improvement from earlier forecasts. HCL Tech, however, has retained its 6-8% constant currency revenue forecasts for FY24, while services revenue growth is seen ranging from 6.5-8.5%.

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