Accenture guidance to spur US IT spend

Analysts say broad-based growth acceleration is a positive for all Indian infotech companies

An increase in revenue growth guidance for the third consecutive quarter by Accenture signals an improvement in the IT spending environment in the US and is a positive for the Indian IT sector.

Accenture, which reported an 11 per cent year-onyear revenue growth on a constant currency basis for the third quarter ended May (year ending in August), is poised for a revenue growth of 9.5-10 per cent for FY18.

A year ago, the company had eyed 5-8 per cent growth and revised it thrice, the last being at the end of February. Analysts say broad-based growth acceleration and guidance is a positive for all Indian IT firms, especially given that Accenture’s $40 billion annual revenue is twice that of TCS. Further order inflow at $11.7 billion is also at a record high with roughly half being contributed by outsourcing services.

In addition to the sector growth, among Indian firms Tech Mahindra, Wipro and HCL Tech could benefit more given their exposure to sectors such as communication, media and technology.

Among Accenture’s five verticals, the communication, media and technology vertical recorded the highest growth of 18 per cent year-onyear. While large deal wins for Accenture are positive on the sector as it indicates spending improvements, analysts believe that strong Accenture results could also mean that the company is taking away market share from Indian companies. Secondly, while 60 per cent of its revenues are from new services such as digital, the metric for Indian IT firms is half that.

Considering that 70 per cent of revenues of Indian IT come from the legacy business, which is growing in single digits (compared to digital which is growing at 25-30 per cent), the transition is expected to be gradual. Among larger IT companies, TCS is best placed in terms of digital capabilities and scale, say analysts.

Analysts say that there could be further earnings upgrades given the outlook and weak rupee. The rupee has gained about 7 per cent since the start of the year which is favourable given that every per cent change in currency improves profit (before tax and interest) by 30 basis points. The large cap IT space has seen earnings upgrades over the last year by about 200 basis points.