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Accenture’s strong performance indicates sustained demand tailwinds

Growing traction in Outsourcing business positive for Indian IT

Accenture (ACN) reported strong 2Q earnings, increasing its FY21 revenue growth guidance by 250bp on better than expected demand environment. We see its 2QFY21 delivery and commentary as a positive read-across for our Indian IT Services coverage as it indicated continued robust demand in key industries.

Key takeaways from the 2QFY21 earnings

* Strong operating performance: Revenue at USD12.1b (+5% YoY in CC terms, +7% YoY, excluding travel reimbursements) was 100bp above its guidance and consensus estimates. ACN reported its highest ever new deal wins of USD16b, up 13% YoY (both Outsourcing and Consulting TCV was up 10%). On a LTM basis, outsourcing TCV is up 17% YoY, implying strong traction in the business.

* Outsourcing remains the main growth pillar: Outsourcing revenue was up 11% YoY in CC terms, the fastest in the last six years. The management expects double-digit growth in 2HFY21 as well.

* Guidance increased by 250bp: ACN maintained its trend of quarterly increase in fiscal revenue growth guidance, raising it by 250bp for FY21 (to 6.5-8.5% from 4- 6%). It also guided for 10-13% YoY CC revenue growth in 3QFY21.

* BFSI and Cloud stood out: The BFSI vertical delivered 10% YoY growth in CC terms, its best performance in the last two years. The management highlighted strong growth trends in Banking and Capital Markets and expects strength in this vertical to continue. It also expects Cloud (~30% of revenue) to continue to grow in double-digits, terming this opportunity as a huge undertaking.

Read-across positive for Indian IT Services peers

* Demand environment remains supportive: The Indian IT Services industry has seen a significant rebound over the last two quarters, aided by increased criticality of technology at large enterprises. ACN’s earnings reiterated the fact that this demand remains a structural trend, which can reflect in the near term performance of Indian IT peers as well.

* Employee attrition a worry: Attrition increased to 12% (+300bp QoQ). The management expects it to normalize going forward. It has ramped up hiring (2QFY21: +50% YoY) and has planned for an extra round of promotions. On the cost side, this is a key concern for the industry as higher employee cost would put pressure on profitability.

* Infosys and HCL Technologies remain our key picks: Infosys and HCL Technologies are best placed in our coverage universe to benefit from a strong demand environment, combining strong growth with attractive valuations.

Highlights from the management commentary

* Growth during the quarter exceeded management’s expectations, along with a strong deal wins. About 50% of revenue came in from seven industries that were not deeply impacted by the COVID-19 pandemic, posting double-digit growth, while 20% business was from disrupted verticals, which declined by mid-single digits.

* The management reiterated that Digital-related spends have accelerated with companies investing in Cloud foundation. It sees a huge opportunity in Cloud in coming years. Accenture Cloud is expected to pose strong double-digit growth going forward.

* Strong revenue growth, higher utilization, and lower travel costs are expected to be key margin tailwinds. This, along with strong cost optimization by the management, led to an increase in its margin guidance.

* The business environment is highly competitive, with some areas seeing pricing pressure. However, stability has started to come in.

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* ACN expects outsourcing to grow by double-digit in 2HFY21.

* The management was pleased with the growth in the Financial Services and Healthcare vertical and expects its strong performance to continue going forward, given their strength in Banking and Capital Markets.

* It plans to invest USD2b on acquisitions, but can do more if required.

Valuation and view – Positive for Indian

IT ACN’s performance and comments reinforce our stance that demand trends, order book, and deal velocity remains robust for the sector. Strong growth and higher book-to-bill ratio in the Outsourcing business (1.4x) resonates well for Indian IT. However, increased attrition remains a point of concern for the industry as higher employee cost would put pressure on profitability. We maintain our positive stance on the sector as we expect sustained growth rates for a longer period of time. Infosys and HCL Technologies remain our preferred picks within Tier I IT.

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