Summary –
- Accenture’s revenue growth forecast has been slashed from a 2-5 per cent range to 1-3%, causing a sharp decline in shares of various IT companies. The Nifty IT index closed over 2% lower, while Accenture’s fiscal performance for Q2FY24 remained stagnant year-on-year.
- The revised revenue outlook now includes 3% from inorganic sources, reflecting the company’s aggressive acquisition strategy. The outlook for Indian IT remains cautious, with discretionary demand unlikely to recover substantially in the first half of FY25.
Introduction
In a significant blow to the optimism surrounding the IT sector, shares of various IT companies experienced a sharp decline, dropping by as much as 6 per cent on the National Stock Exchange (NSE) during Friday’s intraday trade. This downturn follows Accenture’s decision to slash its full-year revenue growth forecast from an initial 2-5 per cent range down to 1-3 per cent, marking a sobering adjustment that reverberated across the industry.
The Nifty IT index, the primary gauge for IT stocks, bore the brunt of this downturn, closing over 2 per cent lower amidst a backdrop of broader market resilience, with the Nifty50 index managing a modest 0.4 per cent increase. The severity of the decline was evident as the IT index tumbled nearly 4 per cent during intraday trading.
Accenture’s fiscal performance for Q2FY24, reporting a revenue figure of $15.8 billion, remained stagnant year-on-year (Y-o-Y) in constant currency (CC) terms and experienced a sequential decline of 2.6 per cent. While this performance was in line with company projections and Bloomberg consensus estimates, the dampening effect emerged from the weak revenue growth forecast for Q3 and the downward revision of its full-year guidance, both of which fell short of market expectations.
Analysts and industry insiders had been cautiously optimistic about a potential upswing in growth for the sector in 2024-25. However, Accenture’s revised guidance, coupled with subdued growth in managed services, suggests that potential clients remain hesitant to commit to significant expenditures.
The revised revenue outlook from Accenture now includes an anticipated 3 per cent contribution from inorganic sources, reflecting the company’s aggressive acquisition strategy. With a total investment of $2.9 billion in acquiring 23 companies during the first half of the fiscal year, Accenture aims to diversify its revenue streams and bolster its competitive position in key markets.
According to a report by Nomura, the outlook for Indian IT remains cautious, with the expectation that discretionary demand is unlikely to recover substantially in the first half of FY25. While revenue growth for large-cap companies is projected to improve compared to the previous fiscal year, driven primarily by cost optimization initiatives, the overall sentiment remains guarded.
During an analyst call following the release of its results, Accenture’s management acknowledged the persistent uncertainties in the macroeconomic environment, attributed to economic, geopolitical, and industry-specific factors. The company emphasised its commitment to assisting clients in navigating these challenges by prioritising strategic transformations and digital initiatives aimed at enhancing productivity and fostering growth.
However, despite notable successes in securing deals related to generative AI (Artificial Intelligence), Accenture’s results underscored the trade-offs involved, as increased investments in transformative technologies came at the expense of other discretionary spending categories.
Softness in key markets, particularly North America and EMEA, further compounds the challenges facing the Indian IT sector. With continued sluggishness in the financial services vertical, a cornerstone for many IT firms, concerns regarding the sector’s growth trajectory persist.
As the industry grapples with these headwinds, analysts anticipate a cautious approach from IT services companies in setting guidance for FY25, with growth prospects varying widely based on factors such as contract ramp-ups, sector exposure, and discretionary spending trends. While the ramp-up of large deal wins may provide a boost to select companies, the prevailing weakness in discretionary spending poses a significant risk to growth expectations.
Additionally, Accenture’s latest report revealed a decline in total headcount, accompanied by a rise in attrition rates, signalling potential challenges in talent retention and workforce management amidst a dynamic operating environment.
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Conclusion
Accenture’s downward revision of its revenue outlook serves as a stark reminder of the prevailing uncertainties confronting the IT sector. While strategic investments in transformative technologies hold promise for future growth, persistent challenges in client spending and macroeconomic conditions underscore the need for resilience and adaptability within the industry.