Accenture- Margin headwinds will likely moderate

Accenture: Margin headwinds will likely moderate

US tech major Accenture  (ACN) has reported strong revenue growth of 15% y-o-y constant currency, 5.2% y-o-y US$ in Q1FY23 (Nov 22-end), above the guided range of 10-14% y-o-y constant currency (CC) terms. Adjusting for foreign exchange impact, which was higher at negative 9.5% vs guidance of negative 8.5%, revenue was ~$150mn higher than the top end of the guidance.

Accenture had provided a moderate guidance of 8-11% y-o-y CC revenue growth for FY23 in the previous quarter (Q4FY22) factoring macro headwinds. The company maintained its FY23 revenue guidance which includes inorganic contribution of 2.5%. However, it now expects foreign exchange (FX) impact to be negative 5% vs negative 6% expected earlier. This translates to 3-6% y-o-y US$ growth (vs 2-5% y-o-y US$ earlier) for FY23.

Accenture’s revenue growth in Q1FY23 was led by managed services that grew 20% y-o-y CC, while consulting revenue growth moderated to 10% y-o-y CC vs 22-32% in the past four quarters.

Management pointed to smaller deal sizes in S&C and focus shifting towards large cost-takeout deals. It expects healthy double-digit growth in bookings and revenue in managed services while consulting revenue is likely to grow in high single digits in FY23. Net headcount addition increased to 16,340 vs 10-11K addition in last two quarters likely due to steep decline in quarterly attrition to 13% vs 20% previous quarter.

Management commentary on slowdown in discretionary spends and focus on cost transformation deals is in line with our view and we have already baked in slowdown in Indian IT services revenue. We continue to prefer stocks that are less vulnerable to slowdown and have the potential to continue gaining market share even in business downturns. We continue to prefer large-caps over midcaps.

ACN’s managed services revenue growth has co-relation with Indian IT revenue growth. Its managed services revenue growth has moderated in Q1FY23 to 20% y-o-y from 23% y-o-y in last three quarters. We expect Indian IT services growth also to moderate due to macro demand headwinds.

Accenture’s consulting segment growth has been decelerating for the last three quarters, plus management commentary of slowing decision making and slowing consulting bookings growth implies lesser demand for discretionary spends. We maintain our view that demand for discretionary services is expected to be low for Indian IT services companies as well.

Stocks in our coverage universe have corrected on account of decreasing margins, expectation of moderation of revenue growth momentum ahead, rising inflation, worsening macro condition and rising interest rate environment. Our call of going Underweight on IT Services sector have played out now from here-on we believe margins headwinds will likely moderate but absence of large deals, demand moderation, moderation in Hyperscaler ecosystem, fragile global macro -highlights that risks to revenues estimates are more to the downside than to the upside.

We have factored recession in our estimates but we still believe consensus estimates are higher by 3-6%. As we are entering into a planned recession environment, we will see less uncertain headwinds as compared to earlier cycles.

We believe from Q3FY23 management talks of Indian IT services will start to weaken and impact on revenue growth will be visible in Q1 & Q2 of FY24. We believe Indian IT Services should always be accumulated when US macro is at its maximum pain & next 6-9 months will give investors good opportunity to accumulate preferred bets.