Accenture earnings harbinger of bad news for 3 Indian IT stocks. Sell or hold?

Accenture results and management commentary imply near-term weakness for Indian IT companies and in particular negative for 3 IT stocks - Wipro, LTIMindtree, and Tech Mahindra.

The global IT major's consulting services revenue declined 2% YoY CC, while consulting bookings saw a muted growth of 1% to $8.5 billion, suggesting that clients are still shying away from growth projects.

Jefferies said the continued weakness in consulting offers negative read-throughs for Wipro, shares of which have underperformed with just a 3% return in the last 1 year.

A muted outlook for North America and the communications vertical offers negative takeaways for Tech Mahindra, and LTIMindtree.

While Accenture's growth in North America was tepid at 1% YoYcc, Europe and growth markets grew 7% and 6% YoYcc, respectively. Communications vertical revenues declined by 12% YoY while growth in financial services moderated further to 3% YoYcc.

"We note that growth in North America ex of CMT vertical was higher at 6% YoYcc. Accenture is seeing healthy demand for cloud migration and modernization and data and AI including generative AI," Jefferies said.

Accenture's 4% YoYcc growth in 4QFY23, at the mid-point of its 2-6% guidance, was the sixth straight quarter of revenue deceleration for the company. Going by the company's commentary, FY25 growth expectations could be at risk as well.

All Nifty IT stocks were trading in the red on Friday with LTIMindtree leading the downside with a 2% plus drop. After a 13% upmove over the past six months, analysts expect some reversal in Nifty IT.

With the sector still trading at 24x 1-yr fwd PE (24% premium to 10-yr average PE) amidst an uncertain demand outlook, analysts have maintained a selective stance on the sector.

It is unlikely that discretionary demand will recover meaningfully in 2HFY24F and possibly, FY25F for the India IT industry, analysts said.

"While growth for large-cap Indian IT should improve in FY25F (8.2% YoY) vs FY24F (3.2% YoY), we expect it to be driven by cost take-out deals. We expect operating performance to vary significantly across companies in FY24-25F," Nomura said. The global brokerage firm's top bet in the IT sector includes Tech Mahindra, Coforge, and Birlasoft.

Nuvama analysts have, however, managed to find positive takeaways from Accenture earnings saying even as the management finds clients are getting cautious on the macro, they expect all strategies to lead to tech adoption and upgradation.

"Overall, Accenture's Q4FY23 results and FY24 guidance bode well for Indian IT services companies. We maintain our positive stance on the sector, and expect a sustainable strong demand environment to drive strong earnings growth over the next three years," said Nomura's Vibhor Singhal.