Accenture’s investor and analyst conference held on April 7 points to a growing focus on costs among European firms in the backdrop of the Russia-Ukraine war. This is also relevant to some extent for global companies. Increases in costs can lead to changes in the technical budget and postponement or decline of discretionary spending. Still, it hasn’t affected Accenture’s operations so far.
Accenture’s performance is often viewed as an indicator of the future performance of the Indian Information Technology (IT) sector. Thus, comments from Indian IT companies, which are set to announce March quarter (Q4FY22) results next week, will remain important.
“High inflationary environment and geopolitical tensions (Europe is more vulnerable) are realities to which enterprises are responding. The greater focus on cost is a consequence, but not necessarily a consequence, for Indian IT,” analysts at Kotak Institutional said. To be worse, the cost focus could bring back mega deals for the industry and enable Tier 1 players to close the gap with mid-tier peers Equity in a report on April 8.
True, with companies embracing digital transformation, mid-tier companies have benefited significantly over Tier-1 companies in recent times due to a stronger pipeline of smaller-sized deals.
Tech companies have huge growth opportunities as companies continue to spend heavily on IT services. “Growing adoption of compressed change and accelerating enterprises providing a structural tailwind for Indian IT demand for the next several years,” Kotak analysts said in the report.
Going forward, the metaverse is seen as a compelling opportunity. “Quantum computing, space technology and science technology are potential areas of great demand in future years,” the report said.
Several such areas of growth could support costly valuations of Indian IT companies. For instance, Infosys Ltd and Wipro Ltd trade at 29x and 24x respectively based on consolidated earnings estimates for FY23, while L&T Infotech Ltd trades at 38x as per data from Bloomberg. In general, mid-tier IT companies trade at relatively higher valuations due to better than expected financial results in recent quarters.
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