Accenture's Weak Results Increase Pressure on the IT Sector. Discretionary Spending Decreases, but Brokerage Antiq Believes HCL Tech, Coforge, and Mphasis Still Hold Growth Potential.
IT Stock: Accenture's April-June quarter results indicate that global companies are currently exercising caution in their spending. A decline is evident, particularly in discretionary spending – optional and non-mandatory expenditure within the industry.
Discretionary Spending
Discretionary spending refers to investments made by companies beyond essential operations, for future needs or technology upgrades. Examples include digital transformation, automation, and consulting projects. Accenture's report shows that this type of spending continues to decline.
Accenture's Growth to Continue, but within Limited Scope
Accenture anticipates approximately 5.5% revenue growth in the current quarter, falling within their previously stated range of 3% to 7%. This also represents an estimated 3% increase compared to the previous quarter. However, a decrease in the number of new projects and deals is expected.
Supporting Sectors
Accenture expects b earnings from the BFSI (Banking, Financial Services, Insurance) sector. Income is also being supported by sectors such as healthcare, public services, energy, and communications. These sectors consistently invest in digital infrastructure and technology services.
Slowdown in New Deal Momentum
Accenture anticipates a 4.9% decrease in total bookings this quarter. Consulting bookings, in particular, may see a reduction of up to 10.5%. Conversely, managed services deals are projected to see a modest 2.4% increase. This indicates that companies are prioritizing maintaining existing technology platforms over new initiatives or strategic advice.
Persisting Economic Uncertainty
Accenture previously warned of ongoing global political and economic uncertainty. This is impacting client companies' investment decisions. Until clarity emerges regarding future market conditions, a surge in discretionary spending is unlikely.
FY25 Growth Expected, but Limited
The company maintains its revenue growth forecast of 5% to 7% for FY25, but acquisitions play a significant role in this growth. Excluding acquisitions, organic growth is likely to remain between 2% and 4%.
Accenture's Acquisition-Based Model
Accenture consistently expands its business through acquisitions, both large and small. In contrast, large Indian IT companies have limited options in this area, having spent a large portion of their cash reserves on dividends and buybacks. This leaves them with fewer resources for inorganic growth.
Impact on Indian Companies
Since a significant portion of Indian IT companies' business relies on foreign projects, the results of companies like Accenture have a considerable impact. Indian companies are cautious about the beginning of FY26 and have not expressed expectations of rapid growth.
Weak First Half
Brokerage reports suggest that the first half of 2025 will be challenging for the IT sector. Global uncertainty and reduced discretionary spending will keep demand under pressure. However, if the global situation stabilizes in the second half, there could be a resurgence in company spending.
Nifty IT Index Underperforming
The Nifty IT Index has delivered up to 15% lower returns than the Nifty this year. This is primarily due to investors not expecting significant growth from IT companies. A major surge in the sector is unlikely until investor confidence in client investments returns.
Brokerage's Preferred Companies: HCL Tech, Coforge, and Mphasis
However, Antiq Stock Broking's report indicates that three companies remain promising:
HCL Technologies: HCL Tech remains a top choice due to its b client base, consistent deal pipeline, and operational efficiency.
Coforge: This mid-sized company is praised for its expertise in customized digital solutions and its ability to recover rapidly from downturns.
Mphasis: The company's b foothold in the BFSI sector and low-cost operations position it as a long-term investment with potential for better returns.
