Investor – IT Sector: Accenture results show growth outlook’s strong

Accenture’s Q1FY22 revenues grew 27% y-o-y cc, well ahead of the top end of its guidance. Deal bookings grew 30% y-o-y to an all-time high of $16.8 bn. Accenture raised its FY22 revenue guidance by 700bps to 19-22% y-o-y cc. Management highlighted a strong demand outlook, which bodes well for Indian IT. Amidst supply pressures, Accenture highlighted improved pricing, cost efficiencies and growth to be key margin levers.

Infosys and TechM are our top picks.Revenue growth ahead of guidance: Accenture reported strong revenue growth of 27% y-o-y cc, on a low base, driven by strong demand. Revenue growth was well above the top end of its guided range of 18-22% y-o-y cc and implies a 13.8% CAGR over Q1FY20 revenues. Consulting grew sharply by 33% y-o-y cc, while outsourcing also witnessed strong growth of 21% y-o-y cc. Growth was broad-based with all verticals growing in double-digits and 4 verticals witnessing 20%+ growth.

Broad-based growth: Revenue growth was broad-based across geographies. North America grew by 26% y-o-y cc, Europe at 28% y-o-y cc and Growth markets at 30% y-o-y cc. Among verticals, Consumer Goods, Retail & Travel Services witnessed strong growth across regions. Strong demand outlook: Accenture’s deal bookings were ahead of management expectations across all deal sizes and the deal pipeline remains robust.

Accenture highlighted that compressed digital transformation, wherein enterprises are realising the value of re-platforming to the cloud at speed, is driving strong demand. Furthermore, Accenture remains confident that Cloud, data and AI present a multi-year tech cycle.Revenue guidance raised: Accenture raised its FY22 revenue guidance by 700bps from 12-15% y-o-y cc to 19-22% y-o-y cc (5% inorganic) vs consensus estimate of 14% y-o-y growth. Accenture’s 22-26% y-o-y cc growth guidance for Q2FY22 implies 2% q-o-q growth in Q2 at the upper end. It also implies 11.5-17.5% y-o-y cc growth over H2FY22 on a normalised base.

Supply side pressures persist: While attrition did moderate a bit in Q1, supply side pressures continue to impact the industry. Management indicated that while wage inflation could impact margins near term, it is seeing an improved pricing environment and would focus on cost efficiencies and growth to manage margins and thus reiterated its 15.2-15.4% FY22 margin guidance (+10-30bps y-o-y)Takeaways for Indian IT: Accenture’s Q1FY22 reinforces our confidence on strong demand outlook and growth.

However, supply side pressures would continue to impact margins over the next few quarters. We remain positive with Infosys and TechM our top picks.