Accenture has raised its guidance for FY22 against a backdrop of strong Q2FY22 results. The global information technology (IT) company, which follows its September-to-August fiscal year, now forecasts year-on-year (year-on-year) constant currency revenue growth in the range of 24-26%, up from previously was 19-22%. However, this guidance does not factor in the escalating impact of the ongoing Russo-Ukraine war.
Strong demand for digital transformation and cloud adoption should ensure that the pace of demand remains high. Accenture’s Q2 revenue from outsourcing, where it competes with Indian IT firms, grew 23% in constant currency terms and new bookings grew 9% to a record $8.7 billion. Technology Services and Strategy & Consulting increased total new bookings, the company’s management highlighted in its Q2 earnings call.
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According to Jefferies India Pvt, Accenture’s performance bodes well for the Indian IT sector. Ltd. Analysts. “This provides some comfort with respect to concerns over growth in client IT budgets amid poor macros,” he added. However, margins of Indian IT firms are likely to be under pressure, analysts said.
Accenture’s high attrition level continues to be a cause for concern for the margin outlook. Annual quarterly attrition increased 600 and 100 basis points (bps) year-over-year and sequentially to 18% in the second quarter. One basis point is 0.01%.
In addition, wage inflation in an uncertain labor market poses a risk to margins. Essentially, Accenture narrowed its FY22 yoy margin expansion guidance by 10-30 bps to 10 bps.
Despite Accenture being in a position to exercise more pricing power than many of its Indian IT peers, modest re-acceleration in attrition and effective lowering of margin guidance point to longer-than-expected short-term supply pressures. According to a report by Nirmal Bang Institutional Equities on March 19.
In such a situation, how the margins of Indian IT companies will grow will be important. Better pricing in new contracts can help reduce the impact of higher costs. Besides, Indian IT companies have a small tailwind in the form of depreciation of rupee. Strong demand prospects of the sector may support higher valuations. According to data from Bloomberg, Infosys Ltd., Wipro Ltd. and Tech Mahindra Ltd. trade at 29x, 24x and, 21x respectively, based on consolidated earnings estimates for FY13.
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