Covid-19 fallout: Accenture’s cut in revenue growth guidance spells trouble for Indian IT firms

Venkatesh Ganesh Mumbai | Updated on March 20, 2020

The company lowered its revenue growth expectations for FY20 to 3-6 per cent compared to the earlier guidance of 6-8 per cent

Lowering of fiscal 2020 revenue guidance to 3-6 per cent by IT major Accenture could ring alarm bells for Indian software exporters such as TCS and Infosys.

In fiscal 2019, Accenture lowered its revenue growth guidance and earnings outlook for FY20, stating that the uncertainties on demand emanating from the Covid-19 outbreak and revenues are expected to come up in the May 2020-ended quarter. For FY20, Accenture expects revenue growth to be in the 3-6 per cent range y-o-y, compared to the earlier guidance of 6-8 per cent. This is in constant currency.

Demand may suffer

Indian IT companies have been reporting growth in the range of 7-8 per cent and Accenture's revenue guidance cut confirms fears about a possible hit to revenue growth for Indian tech companies in H1FY21 due to global growth scare and potential reset to client situations. So far, there has not been any direct impact on Indian IT vendors in terms of client loss or delivery disruption. “However, the Covid-19 has certainly impacted the business of Fortune Clients for Indian IT vendors and, thus, would have pass-on impact in many cases into pricing pressure, cut in discretionary spends or at-least slower start in deal ramp-up,” said Rahul Jain, VP Research Dolat Capital.

Accenture’s performance is the first set of quantitative data which has come out after the onset of Covid-19 disruption in APAC in late December 2019. The company’s cut needs to be seen in the backdrop of strong order bookings of $14.2 billion, a 20.5 per cent yearly growth, which, according to analysts, is the highest in recent quarters.

We believe that Accenture's guidance cut confirms Street's fears about a possible hit to demand for Indian IT, given the broad-based implications across sectors or verticals and the likelihood of delays in deals being signed and commissioning of project, that could impair the performance of Indian techs as well in the first half of 2021 fiscal, according to an analyst.

Prospects gloomy for FY21

TCS, Infosys, HCL Tech, Wipro and others are set to report fourth quarter numbers in April. Indian IT's FY21 growth prospects are at risk, a significant contrast to the post December-ended quarter view that had factored in normalisation or improvement in revenue growth in fiscal 2021. The IT index has been down around 30 per cent in one month and stocks like Infosys touched 52-week lows this week.

However, some analysts believe that Accenture’s performance need not be extrapolated to the performance of Indian software exporters. “It should be noted that the downgrade was driven more by Accenture’s Consulting segment rather than outsourcing business segment, which is more relevant to Indian IT,” noted a Motilal Oswal report. Analysis of geographical growth rates, utilisations and new deal wins in outsourcing suggests no damaging disruption due to Covid-19 so far, the report added.

The revised revenue growth, margin guidance, commentary around demand and supply are encouraging, especially in the context of the recent alarming increase in Covid-19 cases in major markets such as the US, the UK and Europe. “This should partly calm the nerves of Indian IT investors about the potential disruption to operations, business continuity and new deal wins,” stated Motilal Oswal analysts.

Published on March 20, 2020

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