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Published on 20/03/2020 4:16:01 PM | Source: Motilal Oswal Securities Ltd

IT Sector - Accenture`s outlook should calm the nerves! by Motilal Oswal

Posted in Broking Firm Views - Sector Report| #IT Sector #Motilal Oswal #Sector Report

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Accenture’s outlook should calm the nerves!

Commentary and outlook are encouraging

* The company witnessed a robust increase of ~22% YoY in new bookings, driven by high demand for digital, cloud and security related services.

* This is impressive given the nearly two months of COVID-19 disruption in APAC/growth markets and almost a month of restricted global travel.

* Strong increase in bookings was led by Outsourcing (~40% YoY, CC) which is a key positive read through for Indian IT companies.

* For FY20, the company now expects revenue growth to be in the range of 3-6% YoY (CC), compared to the earlier guidance of 6-8% YoY (CC). This guidance downgrade was attributed to the COVID-19 impact - a significant part of which is expected to come in the May'20 quarter.

* It should be noted that the downgrade was driven more by the Consulting segment rather than Outsourcing (which is more relevant to Indian IT).

* The company now expects margin expansion of 10-20bp YoY in FY20 v/s earlier expectation of 10-30bp, indicating limited expected disruption to operations.

 

Impressive performance despite COVID-19 impact on growth markets

* Overall revenue grew ~8% YoY in local currency at the top end of the guidance, despite nearly two months of COVID-19 disruption in some growth markets.

* Growth was broad based across the Consulting and Outsourcing segments.

* Across geographies, growth was driven by North America (11% YoY, CC). Despite slight deceleration (from 13% YoY in 1QFY20 to 11% YoY CC), growth markets delivered a good performance, especially in the context of COVID-19 impact for almost two months in some key APAC countries.

* Europe (2% YoY, CC) remained a drag on overall growth.

* Growth in Financial services (3% YoY, CC) was weak. Within this segment, while Insurance reported strong growth, Banking and Capital markets remained modest. Growth in FSI was largely driven by growth markets, followed by the Americas, while business in Europe witnessed a contraction.

* Notably, the key operational parameters like utilization remained stable (at 91%), despite the lockdowns in some geographies.

Adapting to a new way of work due to COVID-19

* The company indicated that, till date, it has not experienced any material disruption to its service delivery.

* Travel was restricted and employees were asked to work from home wherever possible. Significant portion of the workforce (60% in India/Philippines and ~85%-90% in geographies like Italy/Spain) is already using this option.

* Accenture has a good expertise in virtual work using collaborative technologies. Note that the company is the largest user of Microsoft Teams globally.

* In cases where services cannot be delivered from home due to the nature of the business or other constraints, measures are taken to reduce the density of e mployees across centers, initiate extra hygiene and social distancing protocols.

* Anecdotes around continued recruitment and virtual onboarding in lockeddown and heavily impacted geographies like Italy reiterate the company’s/business model’s adaptability in challenging situations.

Should calm the nerves of Indian IT investors

* Accenture’s Feb’20 performance is perhaps the first quantitative data which came out post the start of COVID-19 disruption in APAC in late Dec’19.

* Analysis of geographical growth rates, utilizations and new deal wins in outsourcing suggests no damaging disruption due to COVID-19 so far.

* 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 like 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.

* Despite the near-term COVID-19 uncertainties, we continue to like Infosys/HCLT/TCS among Tier I, and LTI/Mindtree/Hexaware among mid-caps.

* This is attributable to their robust business models, high return ratios, strong management teams and attractive valuations after the recent sharp correction.

* These companies have the legacy of overcoming multiples business challenges and technology change cycles in the past. Accordingly, we believe they will be able to adapt and overcome any transient challenges posed by COVID-19

 

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