Growth of Accenture moderates despite record deal wins: IIFL Capital Services

Q3FY23 guidance of 3-7% CC YoY reflects decelerating growth, given the ongoing macro challenges. Growth in Q2 continued to be led by Managed Services (+16% YoY CC), while Consulting (+4% YoY CC) saw further moderation. Adjusted EBIT margin stood at 13.8% (+10bps YoY), with ACN maintaining FY23 Adjusted EBIT margin guidance of 15.3-15.5% (+10bps to 30bps YoY). ACN announced a cost optimization plan, which is expected to impact 19,000 employees and cost USD1.5 billion through FY24. New bookings came in at an all-time high of USD22.1 billion (+17% CC YoY), driven by Managed Services (+32% YoY) and larger transformation deals, while Consulting remained tad soft (-2% YoY). Management indicated that the pipeline remains healthy. ACN highlighted that shorter Strategy & Consulting deals are likely to remain subdued, leading to lower near-term growth.

Growth moderation led by Comm, Media & Hi-tech

Among verticals, Resources led the way, growing 16% CC YoY this quarter. Healthcare & Public Services and Products remained healthy at 15% CC YoY. Financial Services and Products saw moderation in growth to 10%/9% CC YoY, while Communications was flat CC YoY. Management commented that priorities for different sectors are shaping up differently. Client’s focus on return on investments (ROI) is leading to larger transformation projects with cost agendas, rather than smaller deals focused on revenue acceleration.

Larger transformation deals take Managed Services bookings to a new high

New bookings for the quarter increased 17% CC YoY (+13% YoY in USD terms) to USD22.1 billion — reflecting continued momentum in larger transformation deals. In Q3, there were 35 clients (24 in Q2) with over USD100 million in bookings. Bookings for Managed Services remained robust growing by 32% YoY; while Consulting bookings declined 2% YoY. Management indicated that they expect see moderation in bookings in Q3.

Notables

1) Growth in North America moderated to 5% YoY CC, as strength in Public Services, Health and Utilities was offset by weakness in Comm, Media & Hi-tech. 

2) Europe grew 12% YoY CC, led by growth in Industrial, Banking & Capital Markets and Public Services. Germany, France and Italy led growth. 

3) Within Services, Technology and Operations led with double-digit growth; while Strategy & Consulting de-grew by mid-single digits. 

4) Attrition declined to 12% in Q2 (versus 13% in Q1). 

5) New bookings hit a new record of USD22.1 billion (+17% CC YoY), driven by larger Managed Service deals. 

6) ACN initiated actions to streamline operations, transform non-billable corporate functions and office spaces — to reduce costs. Total cost of these operations is expected to be USD1.5 billion (USD1.2 billion for severance and USD300 million for consolidation of office space) over FY23-24.

Focus on cost agendas to continue favoring Indian IT

Analysts at IIFL Capital Services believe ACN’s Q2 results and narrowed FY23 organic growth outlook of 6%-8% CC YoY (versus average FY18-20 outlook at this time of the year of 3-6%) combined with the record Managed Services bookings bodes well for Indian IT services companies. Overall, they believe the focus shifting to Managed Services should benefit India IT more, and growth in the medium term should remain higher than the pre-COVID levels. Analysts at IIFL Capital Services prefer stocks with better growth visibility among large caps (INFO and LTIM).