IT Sector is showing clear signs of moderation. Maintain underweight stance: ICICI Securities

Clear signs of moderation

Accenture (ACN) reported healthy revenue growth of US$16.159bn (21.8% YoY US$) led by decent growth across consulting (24.4% YoY US$) and outsourcing (18.7% YoY US$). However, YoY revenue growth rate moderated compared to last two quarters in consulting (Chart 2). Moderation in YoY growth rate can be seen across verticals and US region as well.

ACN reported healthy deal bookings of US$17bn (10% YoY); however, book-to-bill reached near pre-covid levels – consulting bookings at US$9.1bn (13.8% YoY) with book-to-bill of 1.0x (vs 1.1-1.3x in last five quarters and 1.02x in FY18 and FY19) and outsourcing bookings at US$7.8bn (5.4% YoY) with book-to-bill of 1.09x (vs 1.2-1.4x in last five quarters and 1.06/1.09 in FY18/FY19). Management expects deal booking and revenue growth momentum to continue for next quarter as well and has upgraded revenue growth guidance for FY22 to be 25.5% to 26.5% in local currency (vs 24% to 26% previously).

ACN’s pace of net headcount addition slowed down with net addition of 11,928 employees (2% QoQ) vs ~40K average net addition per quarter in the last four quarters. It used to be 8-10K per quarter pre-covid. Slowdown in headcount addition, decrease in book-to-bill ratio and moderation in revenue growth all point towards normalisation of growth momentum ahead for IT services industry. We believe revenue momentum is likely to slowdown in H2FY23 for Indian IT services as enterprises delay new projects amidst macro uncertainties.

Management mentioned there is more focus towards cost optimisation now along with growth compared to last year. Amidst high inflationary consumer goods companies are funding their change the business spends via cost optimisation elsewhere. In Europe, industries impacted by macro environment are leveraging technology to achieve energy efficiency, supply-chain resiliency, sustainability and cost optimisation.

Quarterly annualised attrition inched up to 20% (+200bps QoQ) owing to high attrition in India at lower end of pyramid. Onsite wage inflation continues to be major margin headwind. We expect attrition to remain at elevated levels (due to wage hikes) and margins to remain muted (high onsite wage inflation) for Indian IT services in H1FY23.

We re-iterate our underweight stance on the Indian IT services and believe deployment in the sector should be very slow and gradual as we believe there would be many unknown risks (normalisation of tech spend, downside risk on FY24 revenue growth etc.) ahead, which might further degrade valuations. We suggest investor to stick with TCS in large cap; Coforge in mid cap.