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Event update: IT Services; Accenture 4Q – Read-across for Indian IT services

Accenture 4QFY19: A tad weaker on growth and near term growth outlook

Accenture were a tad below consensus on 4Q growth and 1Q revenue guidance. Also, while there was a beat on earnings in 4Q, guidance for FY20 is weaker than consensus. BFSI/Communications within verticals and Europe within geographies lagged on growth, while Resources, Growth markets and Outsourcing led growth.

Result highlights: Below on growth; ahead on earnings

• Revenues at USD11.06bn (vs consensus of USD11.08bn) up 5% y-y in USD and 7.2% y-y in CC terms.
• For FY19 revenues at USD43.2bn up 8.5% y-y. This is within company guidance of 8-9% y-y.
• Overall bookings grew 19% y-y to USD12.9bn (highest ever), with outsourcing growing at ~45% y-y, while consulting bookings were flattish y-y. Overall book to bill 1.2, with consulting at 1.0 while outsourcing was at 1.4.
• 4Q EBIT margins at 14.2% up 20 bps y-y. For FY20, EBIT margins at 14.7% up 20bps y-y
• 4Q Adj EPS at USD1.74 up 10% y-y. For FY19 adj. EPS at USD7.36 up 9% y-y.

1Q and FY20 Guidance: Weaker than consensus 1Q growth and lower FY20 EPS guidance

• Expects revenue growth of 5-8% y-y in CC (incl. 2% contribution from inorganic) in FY20
• Expects revenue growth of 5-8% y-y in CC in 1Q and revenues of USD10.9-11.2bn (below consensus of USD11.26bn) 
• Expects Adj EPS of USD7.62-7.84 in FY20 (growth of 4%-7% y-y). This is below consensus est. of USD7.96

Segmental: Outsourcing, Products/Healthcare/Resources and Growth markets lead growth

• Consulting (7% y-y), outsourcing (8% y-y) in CC terms
• North America (8% y-y), Europe (4% y-y) and Growth Markets (12% y-y) in CC terms
• Financial services (4% y-y), Communication/Media/Technology (5% y-y), Products (8% y-y), Resources (12% y-y) and Healthcare (8% y-y) in CC terms
• Digital is at 65% of revenues in FY20 and grew 20% y-y in CC terms.
• Strategy & consulting (32% of revenues) grew high single digits, technology services (55% of revenue) grew high single digits and operations (14% of revenues) grew double digit in FY19.

Read-across for Indian IT: Marginally Negative – Prefer HCLT/INFO & MPHL

• Moderation in revenues growth across segments (ex of Healthcare and outsourcing). Further, ACN missed consensus estimates on growth in 4Q and guided for weaker revenues versus consensus in 1Q. We remain cautious on growth for tier 1 IT and are below consensus on FY21E expectations.
• Soft performance in BFSI and Europe, with ACN seeing a contraction in Europe BFSI. We see higher risks at TCS given higher European skew of growth and overall stay cautious on BFSI demand in light of weakening client financials.
• Outsourcing stays defensive, should prevent a material fall off in growth. For ACN, Outsourcing is now leading consulting on growth and bookings in 4Q were also strong. In our view, tier 1 IT skew towards outsourcing should prevent a material fall-off on growth, even though a moderation is likely.

·      We stay cautious on Europe, BFSI and manufacturing growth. Prefer companies where expectations are lower, possibility of a growth guidance upgrade is higher or dependence on external demand is lower. This coupled with valuation comfort drives our preference for HCLT and INFO among large cap IT and MPHL within mid-cap IT.