IGI Logo

Accenture’s guidance opens the door to an upside in growth in FY23

Extraordinary outlook driven by accelerating Digital spends

ACN reported strong revenue in 1QFY22 and upgraded its annual guidance by a massive 700bp as it continues to gain from demand for Cloud transformation. Its commentary on broad based demand (by region/verticals/deal size) and record high bookings (USD16.8b) should be seen as an indication of the stickiness in the demand environment for IT Services. We view its organic revenue growth guidance (14-17% in CC) as strong, especially given ACN's penchant of raising its guidance over the year. Moreover, the 200bp reduction in attrition in 1QFY22 supports our view that attrition risk is receding.

Snapshot of 1QFY22 earnings – strong beat on revenue and guidance

* Exceptional operating performance: Revenue at USD15b (+27% YoY in CC and USD terms) was far above its guidance range and Bloomberg consensus estimates. ACN also reported record deals booking at USD16.8b (book-to-bill ratio of 1.12x), up 30% YoY (outsourcing TCV up 17% YoY).

* Strong growth in Consulting: Growth was strong within services, with Outsourcing up 7.5% QoQ and Consulting recording massive (+15%) growth.

* Unprecedented hike in guidance: ACN upgraded its FY22 guidance to 19-22% from 12-15% YoY growth in CC terms (absolute increase of USD3.5b from 4QFY21 levels), despite keeping inorganic impact stable at 5%. The guidance assumes strong double-digit growth in the Consulting business and double-digit growth in the outsourcing business, up from high single-digits earlier.

* Strong net additions: ACN added 50k employees in 1QFY22, which implies a massive 8% QoQ increase in headcount. It added over 160k employees in the past four quarters, which implies a headcount increase of ~31% YoY.

Positive read-across from all angles for its Indian IT Services peers

* The demand environment continues to remain strong: ACN’s commentary on continued strength in spends, led by strong traction for Digital, Cloud, and security, should reinforce confidence on the sustainability of demand. Demand is expected to sustain, given: 1) the early stage of Digital adoption, and 2) multiyear Cloud transformation journey, which will open up new opportunities. It remains confident on demand for Cloud and Digital transformation. 

* Guidance strong, but conservative: Its 700bp increase in guidance reflects the pace of demand momentum within the industry. Given ACN's habit of increasing guidance over quarters, its Indian IT Services peers must be closely watched for their FY23 guidance as expectations on growth rise.

* Higher pricing: The management’s commentary on better pricing in parts echoes the views shared by many of its Indian IT Services peers over the last few months and should provide additional revenue and margin levers going forward.

* Decline in attrition was surprising: ACN saw a 200bp decrease in employee attrition (from a multi-year high level) in 1QFY22, which suggests some moderation in the supply crunch.

* Pressures exist, but margin strength intact: The management indicated that supply-side pressures continued in 1QFY22. Despite this, it has guided at a 10- 30bp improvement in margin in FY22 over FY21 levels, which suggests benefits from operating leverage and pricing improvements.

Key highlights from the management commentary

* Bookings and pipeline: About 20 clients had bookings of more than USD100m. Strong bookings were seen across Consulting and Outsourcing. The company added 15 new diamond clients in 1QFY22 v/s 13 in FY21. The management is confident about more such wins as it has a strong pipeline (despite strong bookings) in a relatively soft quarter.

* Early stages in Digital transformation: The management said companies are in the early stages of Digital transformation for both core modernization and Cloud transformation. Only ~30% workloads are currently on Cloud, which is a multiyear journey and opens new opportunities as organizations make the shift.

* Margin to grow despite increased wage costs: The management expects margin to remain under pressure in 2QFY22 due to ongoing supply-side challenges. It expects margin to improve by 10-30bp in FY22 over FY21 levels.

* 2QFY22 guidance: The management has guided at 2QFY22 revenue at USD14.3- 14.75b, implying 22-26% YoY CC growth and a forex impact of -4%.

Valuation and view – Positive for Indian IT

ACN’s commentary reinforces our view that the demand environment continues to remain strong and is sustainable. The upgrade in its FY22 guidance and strong headcount addition provides visibility of the growth momentum in Indian IT Services. While supply-side challenges remain a point of concern, ACN’s margin guidance implies stable to improving margin performance in FY23. We maintain our positive stance on the sector as we expect sustained growth with stable margin. INFO, HCLT, and TCS remain our preferred picks within the Tier I IT space.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer