Global technology major Accenture’s first quarter earnings announced last week is an indication of sharp moderation in growth for Indian IT services companies in FY24, according to analysts. Accenture has guided for a 6-10% year-on-year growth in constant currency for Q2 FY23 and maintained its FY23 revenue growth guidance of 8-11% in constant currency, reflecting moderation in demand.

Accenture, which follows a September-August fiscal, has implied a revenue growth of 5.6-9.6% year-on-year in constant currency for the second half of FY23, “reflecting the demand uncertainty as well. Accenture’s guidance could change meaningfully as client budgets are frozen in Q1 CY23, especially in a volatile demand environment, as seen in the past,” analysts at Jeffries said.

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This has also pulled IT stocks down with the BSE IT Index falling 0.55% to close at 28,633.12 on Monday. Some of the stocks that took a hit include Tata Consultancy Services (TCS) which fell 1.13%, Infosys (down 0.97%), and Coforge (down 1.39%) on the BSE.

Accenture’s growth in Q1 was driven by the outsourcing (now referred to as managed services) segment which reported an annual growth of 20% compared to consulting which grew only 10% in constant currency. “This reflects a shift in client focus towards cost optimisation projects versus growth projects,” Jeffries said.

“Its consulting segment growth has been decelerating for the last three quarters, plus management commentary of slowing decision making and slowing consulting bookings growth implies lesser demand for discretionary spends. We maintain our view that demand for discretionary services (like customer experience) is expected to be low for Indian IT services companies as well. Demand for engineering and R&D services may also be impacted,” analysts at ICICI Securities said.

Accenture’s earnings are considered a barometer for what is likely to come for Indian IT services companies. It is the strongest in the consulting segment among all IT services players and a slowdown in growth in this space is a reflection of cautious discretionary spending.

Analysts expect the overall attrition to slow down significantly as Accenture’s attrition rate in Q1 declined to 13% from 20% in the preceding three months. “With falling growth outlook, tech layoffs, and weaker funding for Indian tech startups, we expect attrition to fall significantly for Indian IT companies over the next few quarters, providing tailwinds to margins,” brokerage firm Nomura said in a note.

However, some analysts are of the view that large cost-transformation deals are likely to result in lower margins in the initial phase. “We expect margins for Indian IT services to remain range bound in FY23,” analysts at ICICI Securities said.

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In terms of deal pipeline, Accenture’s management said that the company is seeing a higher proportion of cost optimisation deals and indicated that clients are pausing on smaller deals. The management however stated that the deal pipeline remains healthy and it expects strong bookings in Q2 FY23.

Analysts at Jeffries said that increasing client focus on larger cost optimisation deals and slowdown in smaller deals position larger IT firms more favorably than mid- and small-sized firms.