04-01-2022 01:16 PM | Source: Motilal Oswal Financial Services Ltd
Update On Accenture Ltd By Motilal Oswal
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Accenture’s guidance indicates continued growth momentum in FY23E… …Europe demand to remain intact!

Accenture (ACN) reported another robust quarter with 2QFY22 revenue growing 28% YoY in constant currency (CC) terms. ACN also upgraded its FY22 revenue growth guidance by 450bp. With this the total increase amounts to a massive 12pp over the last two quarters, as it continues to gain from the demand for Cloud transformation. The broad-based, double-digit growth and an all-time high deal bookings of USD19.6b (17% above the previous high seen in 1QFY22) provide good demand visibility for IT services. Conversely, though the 10bp cut in EBIT margin guidance for FY22 denotes some pressure, improved pricing and operating leverage should help offset the headwinds and aid profitability.

Snapshot of 2QFY22 results – strong beat on revenue and guidance

Operating performance above expectation: ACN’s revenue at USD15.0b (+28% YoY in CC and +24% YoY in USD) was notably above its guidance/Bloomberg consensus estimates. It also reported record deal bookings at USD19.6b (bookto-bill of 1.3x), up 22% YoY (Consulting +36% YoY/Outsourcing +9% YoY).

Consulting continues to outpace Outsourcing: ACN reported strong growth in both the segments with Consulting up 34% YoY and Outsourcing up 23% YoY

Another big revision in revenue guidance: ACN upgraded its FY22 revenue growth guidance to 24-26% from 19-22% YoY in CC (450bp upgrade), while keeping the inorganic impact stable at 5%

Operating margin: EBIT margin was flat YoY at 13.7%, although management lowered the mid-point of guidance band by 10bp

Net additions relatively modest: ACN added 24k employees in 2QFY22, its lowest addition in four quarters, growing 4% from 1QFY22 when they added a historic 50k people.

Demand momentum reassuring for the Indian IT Services sector

Strong demand environment: Management provided positive commentary indicating healthy pipeline and strong spends in areas of digital, cloud, Web 3.0 and security. Several companies are in their early stages of cloud transformation initiatives with only 30% of workloads on cloud. Moreover, the data (once on the cloud) will open further opportunities for IT Services companies. This offers good visibility of sustained demand environment.

Upgrades to growth guidance: The 450bp revenue guidance upgrade over the 700bp upgrade in the last quarter reflects sustainable and strong demand trend. Moreover, given ACN's tendency of increasing guidance over the quarters, its Indian IT services peers would be closely watched for their commentaries on FY23 as expectations on growth escalate.

Improved pricing: The company’s commentary suggested healthy pricing environment. ACN witnessed price improvements in bookings during the quarter and indicated good pricing power for in-demand skills

Expect stable margins: Management indicated that supply-side pressures sustained in 2QFY22 with continued wage hikes. Though 10bp margin guidance cut for FY22 denotes some pressure, improved pricing and operating leverage should help offset the headwinds and aid profitability.

Key highlights from the management commentary

Bookings and pipeline: 36 clients had bookings worth more than USD100m. Strong bookings were visible across Consulting and Outsourcing segments. Management was also confident about the wins as ACN has a robust pipeline (irrespective of the strong bookings)

In the early stages of digital transformation: Management highlighted that ACN is in the early stages of digital transformation for both core modernization and cloud transformation. Only ~30% workloads are currently on cloud, which is a multi-year journey and opens new opportunities as ACN moves to cloud.

Margins to grow despite increased wage costs: Management expects margins to improve in 2HFY22 to clock 15.2% margin for FY22 despite the headwinds

3QFY22 guidance: Management has guided for revenue at USD15.7b-16.15b in 3QFY22, implying 22-26% YoY CC growth and -4% FX impact.

Valuation and view – Positive outlook for the Indian IT services sector

ACN’s commentary reinforces our view that the demand environment continues to remain strong and is sustainable in the long run. Further, upgrade in FY22 guidance provides visibility to the Indian IT services sector’s growth momentum. While supply-side challenges remain a point of concern, ACN’s margin guidance (marginal cut of 10bp) implies stable margin performance in FY23. We maintain our positive stance on the sector as we expect sustained growth with stable margins. Infosys, HCL Technologies and TCS remain our preferred picks within the Tier I IT space.

 

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