Strong Q3 results from Accenture indicate a promising future for Infosys, TCS, and HCL

IT Sector Outlook: The industry powerhouse Accenture posted stellar quarterly performance. Accenture increased its growth forecast for FY22 from 25.5% to 26.5%. While the corporation had maintained its growth estimate at 24-26% in the previous quarter. Currently, there is robust demand in the business despite the volatility, rising growth guide, and consistent margin projection. According to brokerage firms, this is also a very encouraging sign for the local IT industry. Stocks like Infosys, HCL, and TCS have garnered the confidence of brokerage firms.

Accenture Q3 Revenue Beats Street Estimates

Accenture exceeded Wall Street projections, bringing in $16.16 billion in sales during the quarter that concluded in May 2022. (Q3). The amount increased by 22% over the $13.26 billion reported for the same quarter a year earlier, helped by the cloud and digital transformation. The Indian IT services market looks promising given the double-digit growth rate.

The fiscal year for Accenture is September through August. The third quarter included the months of March through May 2022.

Accenture Increases Its Revenue Guidance

Although the company increased its annual revenue projection, it anticipates a 4.5% negative impact from foreign exchange on its earnings. Additionally, Accenture stated that it anticipated full-year revenue to be in the range of 25.5% to 26.5%.

Unexciting 4QFY22 Guidance To Add to Macro Concerns

While ACN raised its FY22 target up by 100bp (at the midpoint), it projected at 20-24% YoY CC growth in 4Q, down from 27% in 3QFY22, according to brokerage house Motilal Oswal. Its guidance's top range fell short of consensus expectations, which is expected to increase worries about how a deteriorating macroeconomic environment in the US and Europe could affect business.

The rise in Attrition Levels

Attrition at Accenture increased sequentially in Q3, and management said the increase was seasonal and primarily due to India. Although the management said that conditions were favorable for price hikes, this trend has not changed. Strong demand and consistent decision-making allay any worries about near-term growth; but, high attrition and currency fluctuation present difficulties for earnings, according to Emkay.

The brokerage prefers Infosys, HCL Tech, Wipro, Tech Mahindra, and TCS among tier 1 companies.

Despite a tougher currency headwind of 5% rather than the anticipated 4%, Accenture once again produced higher-than-expected sales growth. Despite the increase in the FY22 currency headwind from 3% to 4.5 %, management increased the revenue growth target for a third straight quarter. Bookings were robust as well, with a book-to-bill ratio of over 1. Accenture's impressive performance and insightful remarks reinforce our hypothesis of a significant tech upcycle, according to Edelweiss.

The brokerage noted that outsourcing growth and bookings are both still strong, which is encouraging for Indian IT services businesses. The brokerage also indicated its preference for Coforge NSE, LTI, and Mindtree among midcap companies and HCL, Infosys, and TCS among large-caps. Among small caps, the brokerage favours Zensar, Birlasoft, and Firstsource.

Cross-currency might significantly hinder the stated growth of Indian IT companies in FY23F, according to Nomura India. The favourable effect on margins from the rupee's devaluation against the dollar is anticipated to be cancelled out by the dollar's strength relative to European currencies.

Supply-Side Issues Persist

"The market's worry over a slowdown in IT company growth has been allayed thanks to Accenture Inc.'s outstanding results. Positive management remark emphasises the continued strength of the strong demand trajectory. This is good news for Indian IT companies because there were expectations of modest future growth due to the possibility of a hard landing following the significant rate hikes by central banks around the world, which would have resulted in a decline in the purchasing power of businesses and a reduction in IT spending. Employee attrition and salary inflation are still supply-side problems, though. From a longer-term view, we are optimistic about IT businesses, and the recent pullback offers a favourable entry point, according to Punit Patni, an equities research analyst at Swastika Investment Ltd.

Brighter Days for India IT Sector

However, the Indian IT industry is showing promising indicators, according to global brokerage house CLSA. According to the brokerage, domestic IT firms can exhibit strong demand in the June quarter just like Accenture did. Investors place a lot of emphasis on margin management. The brokerage claims that the IT sector has a positive near-term outlook and that companies like Infosys, TCS, and HCL can do well. Their stock price may also be strong.

According to Motilal Oswal, the demand climate is still favourable, and the sector's growth has not yet been impacted by the weakening macro environment. "ACN's margin guidance implies a stable margin performance in FY23, even though supply-side problems continue to be a source of worry due to elevated attrition and decreased personnel addition. We continue to see the sector favourably since we anticipate steady growth with a consistent margin. In the Tier I IT market, INFO, HCLT, and TCS continue to be our top choices, the note stated.

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