Why robust Accenture earnings should not be extrapolated to Indian IT space?

Exceeding its guidance of 5-8 percent growth in Q1FY20 by $160 million, Accenture grew by 7 percent in dollar terms, giving a good start to FY20.

However, brokerage Nirmal Bang in a report stated that it remained cautious on Indian IT sector, adding that the leading performance of Accenture should not be extrapolated to the Indian players.

"The broad-based growth was driven by double-digit growth in Healthcare and Public Services (HPS), broad-based recovery in Europe except in financial services, which contracted and is likely be under pressure in the near term, and strong growth in US-backed by the federal business. Improvement in BFSI growth rates (ex- Europe) and strong growth in software platforms – cloud and ERP related also added to the gains," the report said.

All of this coupled with a laser focus on digital, cloud, security and good execution has also helped Accenture gain market share from its peers.

EBIT margin grew 20 bps YoY to 15.6 percent, driven by automation, likely higher utilisation and Accenture’s pricing power in the digital space.

The company said that its approach of ‘Strategy to Operations’ will be a key lever going forward as it helps clients cut costs and increase their investment capacity. For 2020, just as in 2019, Accenture’s focus will be on enterprise-wide transformation, innovation around growth and optimized operations, the report added.

The company's management has mentioned that most of the growth has come due to good execution and market share gains from the competitors. However, in 2020 when the IT industry witnesses pressure on overall spending, the discretionary spending is likely to witness equal if not more pressure, Nirmal Bang noted.

"We believe Accenture is in a much better position to gain market share from its peers due to its strong skills and end-to-end capabilities that a number of large customers want in vendors. Accenture might also have gained because of its lower exposure to verticals like industrials and automotive where there is a slowdown at the moment, which will continue going forward as per management. Its deep penetration within US federal business also helps diversify some risk as there is limited competitive pressure from Indian IT players in this area," the brokerage stated.

Meanwhile, global brokerage Morgan Stanley also said that Accenture's Q1 results were ahead of consensus, but it does not see this as a positive for the sentiment in the Indian IT space.

Nomura also said that Accenture Q1 results were ahead of street expectations,  adding that growth was broad-based led by health, public service, and resources. Bookings were weak in Q1 but guided for strong Q2 bookings, the brokerage further stated.

"Improvement in revenue growth and outlook on bookings is a positive for Indian IT but higher exposure to legacy and weaker presence in growth markets could hamper growth in the Indian IT sector," the brokerage explained.

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