India IT: Status quo on demand; muted guidance maintained

20 Dec 2023 , 10:52 AM

Management indicated that the demand environment continues to witness slower discretionary spending and decision making; especially in the Consulting business. ACN continues to expect FY24 revenue growth to be 2-5% CC YoY (inorganic contribution expected to exceed 2%). Q2 FY24 guidance of (2)% to +2% CC YoY continues to reflect a weak demand environment and assumes a negative FX impact of 0.5% during Q2. Growth in Q1 was led by Managed Services (+5% YoY CC), while Consulting (-2% YoY CC) remained moderate. Adjusted EBIT margin stood at 16.7% (+20bps YoY), and ACN expects FY24 Adjusted EBIT margin to be 15.5%-15.7% (+10 bps to +30 bps). New bookings improved to USD 18.45 billion (+12% CC YoY), with book-to-bill of 1.14x. Managed Services bookings grew by 21% YoY, while Consulting bookings rose by 6% YoY. ACN highlighted that while the demand environment remains muted, strong demand is seen in the Security, Cloud and Gen AI domains.

Communications, Media & Hi-tech continue to drag growth

Among verticals, Healthcare & Public Services led the way; growing 12% CC YoY in Q1. Resources remained healthy at 6% CC YoY. Products and Financial Services continued to see moderation in growth, at 1%/0% CC YoY while Communications, Media and Technology fell 11% CC YoY. Discretionary spending remains slow, especially in Consulting, as the macro environment is still challenging.

New bookings improve, led by Managed Services

New bookings for the quarter grew by 12% CC YoY to USD 18.45 billion. In Q1FY24, there were 30 clients with over USD 100 million in quarterly bookings. Bookings growth for Managed Services was at 21% YoY; Consulting bookings grew by 6% YoY. Management indicated that smaller discretionary deals continue to get pushed out, and the budget cycle will provide a clearer picture for 2024. ACN expects FY24 Adjusted EBIT margin to be 15.5-15.7% (+10 to +30bps YoY). 

Notables

1) Growth in North America moderated to -1% YoY CC as growth in Public Services was offset by weakness in Communications & Media, Software & Platforms, and Banking & Capital Markets. 

2) EMEA grew 2% YoY CC, led by Public Services and Banking & Capital Market segments. Growth in Italy, Austria and France was offset by weakness in the UK. 

3) Within Services, Operations growth was flat, Technology grew mid-single digit and Strategy & Consulting declined mid-single digit. 

4) Attrition reduced to 11% in Q1 (versus 14% in Q4). 

5) ACN continues to invest in GenAI, with a target to invest USD 3 billion over a 3-year span. Demand for GenAI is strong, with over USD 450 million in new bookings. 

6) During the quarter, ACN invested USD 788 million in acquisitions across 12 transactions.

Near-term outlook cautious

Analysts at IIFL Capital Services believe that ACN’s Q1 results and soft FY24 organic growth outlook of 0-3% CC YoY highlight the lack of tailwinds in near-term demand environment. This corroborates with the recent commentary from Indian IT service companies of a tepid business environment; which analysts at IIFL Capital Services believe could lead to a lacklustre finish to FY24. Given that the sector valuations are rich, analysts at IIFL Capital Services recommend a Reduce on Tech Mahindra, Wipro, Mphasis considering weaker growth profile and poor earnings visibility; while valuations have run up. On a relative basis, they prefer Infosys/TCS in large caps and Persistent Systems/COFO/CYL in the midcaps.