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A revival on the horizon

Guidance and demand commentary indicate a slight (but certain) uptick in demand

Accenture (ACN) reported 4QFY24 revenues of USD16.4b, up 5% YoY CC (2% organic) and down 0.5% QoQ CC, near the upper end of the guided range. ACN has guided for 3-6% CC revenue growth for the next fiscal (0-3% organic). The upper end of the guidance assumes a recovery in discretionary spends, according to the company. We believe the guidance, deal bookings, and the overall commentary have turned the corner, which bodes well for the sector. This corroborates our views in our recent thematic (Technology: Bounce-back! Charting the path to revival for IT services), in which we argue that client spend behavior is changing for the better, and we could see a return of modernization and discretionary spends going forward, albeit in some pockets. Our recent upgrades (LTIM, PSYS, and COFORGE) reflect our expectations of growth in pockets such as US banking, Healthcare and Manufacturing as well as a gradual recovery in data, ERP and mainframe modernization projects.

While the slope of recovery, and how broad-based the recovery would be is still up for debate, the ACN guidance and the ensuing outlook reduce the downside risk to our growth estimates. We are not too concerned about variance in revenue growth for Indian IT services companies in the upcoming quarter, and believe it should not lead to a meaningful change in estimates, sentiments, or valuations (short-term gyrations aside). The most important catalyst for the sector would emerge after 3QFY25, when client budgets for CY25 would be finalized and the magnitude of change in client behavior would become clearer.

Positive read-through for Indian IT, healthy bookings growth

* Revenue performance: Revenue stood at USD16.4b (up 5% YoY in CC, 2% organic) in 4QFY24, near the upper end of the guidance range of 2% to 6%. Managed services revenue grew 7% YoY CC, while consulting services grew 3% YoY CC.

* Booking recovered in 4Q: ACN reported outsourcing bookings of USD11.6b, up 41.5% YoY, while consulting bookings grew 1.2% YoY (down 7% QoQ) to USD8.6b. The book-to-bill ratio came in at 1.2x in 4QFY24, consistent with the average of 1.2x over the past four quarters.

* Revenue guidance: ACN expects 1QFY25 revenue growth in the range of 2% to 6% YoY CC, while FY25 revenue growth guidance is given at 3% to 6% in CC (3% inorganic contribution in FY24).

* Vertical-wise performance: Healthcare and Public services led the growth with 11% CC YoY growth in 4QFY24, while Communications/Products/Resources verticals grew 5%/6%/3% YoY CC. However, BFSI declined 2% in YoY CC.

* Stable operating margin performance: Adjusted EBIT margin increased by 10bp YoY to 15% in 4Q. For FY25, margin is expected to be in the range of 15.6% to 15.8%, an expansion of 80bp to 100bp from FY24.

* Attrition remained flat: ACN workforce remained stable in 4Q at ~774k, while attrition remained flat at 14% and utilization stood at 92%.

Health and Public Services led the growth

* Consistent demand environment with notable growth in Security: ACN has observed no significant shifts in the spending patterns of enterprise clients, indicating a stable demand environment. The Security segment continues to be one of the fastest growing parts of business, reaching USD9b in revenue in FY24 with 23% YoY growth. For FY25, revenue growth is expected to be driven by clients' digital transformation efforts and their need to enhance productivity.

* Cloud and GenAI remain key growth drivers: Cloud migration remains a significant driver of growth, particularly in high-performance compute applications like mainframes. GenAI is also expected to continue its rapid growth, with large-scale implementations beginning to take off.

* Outlook for Managed Services and Consultancy: The management continues to expect Managed Services and Consulting to see low-to-mid single digit growth in FY25. Managed Services bookings are driven by large transformation deals.

* Key verticals performance drive growth: Healthcare and Public services led the growth with 11% CC YoY growth in 4Q (9% in 3Q), while Communications/Products/Resources verticals grew 5%/6%/3% YoY CC (- 1%/2%/3% YoY CC growth in 3Q). However, BFSI declined 2% in YoY CC vs. 5% decline in 3Q.

GenAI to act as a catalyst going ahead

* ACN is seeing good traction from clients on GenAI. For FY24, ACN saw USD3b in new GenAI bookings, including USD1bn in 4Q, and clocked nearly USD900m in revenue. The company witnessed a significant jump in revenue in FY24 compared to the previous year, in which ACN clocked ~USD100m in revenue from GenAI.

* The company believes a key challenge is that implementing GenAI will require clients to be prepared with data infrastructure – a fuel for GenAI.

* The implications of Gen AI will become more pronounced and clients’ conversations are changing from POCs to a material rollout and integration of AI into their core operations. Further, the company expects GenAI bookings to accelerate in FY25.

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