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Demand commentary resilient despite macro concerns

ACN reported an inline 4QFY22, with revenue growing 22.4% YoY in constant currency (CC) terms. The management’s initial FY23 guidance of 8-11% in CC terms was positive, considering the heightened macro environmental concerns, a high FY22 revenue base, lower inorganic contribution (2.5%), and its tendency to revise its guidance upwards as the fiscal progresses. We view the read-across as positive. Strong revenue growth, commentary on the pipeline, outsourcing deal wins, and an improved margin outlook, despite wage inflation, are key positives

4QFY22 earnings snapshot – A good overall performance

* Strong operating performance: Revenue grew 22.4%/14.9% YoY in CC/USD terms to USD15.4b, in line with Bloomberg consensus estimates and the management’s guidance. ACN reported the second highest deal bookings, up 31% YoY to USD18.4b, with a book-to-bill ratio of 1.2x. The same for Consulting/ Outsourcing rose 5%/40% YoY.

* Strong beat in Outsourcing: ACN reported a strong growth in Outsourcing bookings, which rose 40% YoY to a record high of USD9.9b (a book-to-bill ratio of 1.4x). Consulting bookings rose 5%

* Revenue guidance: In CC terms, ACN guided a revenue growth at 10-14%/8-11% YoY in 1Q/FY23, which is surprising given the high base of FY22 and heightened macro environment concerns.

* Operating margin: EBIT margin rose 10bp YoY to 14.7%, and the management guided at a FY23 margin of 15.3-15.5% (up 10-30bp YoY).

* Net additions: ACN added ~11k employees in 4QFY22, the lowest employee addition in the last seven quarters.

Strong operating performance provides demand visibility to the Indian IT sector

* Demand environment: The management indicated a healthy pipeline and strong spends in the areas of Digital and Cloud. It expects all markets to grow in double-digits in 1QFY23, including Europe, despite macro concerns. It expects Outsourcing to outgrow Consulting, which is positive for the Indian IT sector.

* FY23 guidance remains healthy, despite a challenging macro: ACN’s 8-11% CC revenue growth guidance is positive considering the current macro environment, high revenue base of FY22, and a lower inorganic contribution. Strong bookings of USD18.4b (1.2x book-to-bill ratio) provide near-term comfort.

* Margins expand despite supply headwinds: The management indicated continued wage pressure in FY23. Despite this, it guided at 10-30bp margin expansion in FY23 largely on account of improved pricing.

Key highlights from the management commentary

* The management guided at a revenue of USD15.2-15.75b in 1QFY23, implying 10-14% YoY CC growth and a forex impact of -8.5%. It guided at a revenue growth at 8-11% YoY CC in FY23, with a forex impact of -6% on account of increasing rates. Inorganic contribution will be ~2.5% in FY23.

* It expects margin to expand by 10-30bp to 15.3-15.5% in FY23.

* The management said the deal pipeline remains healthy, but bookings will remain muted in 1QFY23 on account of seasonality.

ACN’s performance suggests a positive outlook for the Indian IT sector

ACN's 4Q performance and FY23 guidance suggest continued traction in Tech spending in the near-term. Outsourcing meaningfully outperformed Consulting, which implies a good demand for its Indian IT peers. A strong rebound in bookings should assuage any demand related concerns for its Indian IT peers. With attrition remaining flat and ACN’s improved margin guidance implies a good margin performance in FY23. We maintain our positive stance on the sector as we expect sustained growth with a stable margin. TCS, HCLT, and INFO remain our preferred picks within the Tier I IT space.

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