Motilal Oswal Financial Services

Sector Update | Technology

Technology

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Demand remains robust; sanguine commentary by Accenture

BFS is strengthening, contrary to peers’ citation of weakening pockets

Accenture’s 3QFY19 performance was steady on the revenue growth front; and

though order bookings were on the softer side, the company has ruled out any

demand concerns. Key insights highlighted below:



Improvement in BFSI, in line with past commentary:

For some time now, the

BFSI segment has been subdued for Accenture. As indicated in earlier quarters,

3QFY19 performance was led by double-digit growth in Insurance and revival in

BFS (double-digit increase in growth markets and healthy performance in North

America). Europe BFS continued to contract. 4QFY19 is expected to witness

continued improvement in performance, which, although on a low base, is in

contrast to peers’ commentary of weak pockets within the vertical (cited by TCS,

INFO, WPRO and CTSH).



Strong demand environment:

ACN stressed that it remains excited about the

demand environment, and the same is reflected in its revenue growth. Though

3QFY19 bookings were weak due to inherent volatility and lumpy nature on a

QoQ basis, it is not a sign of any demand weakness. Deal visibility is strong and

bookings in 4QFY19 should improve; 65% of the bookings were from the ‘New’,

which includes Digital, Cloud and Security. ACN also highlighted that in the

future, IT Services’ companies may witness traction in non-linear revenue

growth as the market moves towards platform-based and intelligent services.



Outsourcing growth – a relevant positive for Indian IT:

Outsourcing grew 10%

YoY CC v/s Consulting, which grew 7% YoY CC. ACN expects high-single-digit

growth in the near term for both Consulting and Outsourcing.



GPM improvement – aided primarily by pricing:

ACN continues to invest in

areas that can demand premium pricing. This has been one of the key levers for

improvement in gross margins. Also, realization rates in recent quarters seem to

have stabilized for India-origin providers, as a function of the business mix.



M&A – a key proposition in the business model:

ACN has spent USD1.1b on

M&A, acquiring various companies with the ‘New’ offerings, with focus on

Digital agencies. ACN expects USD1.3b spending on M&A related activities, with

inorganic revenue contributing ~2pp to FY19 growth.



Our view:

Accenture’s performance and comments reinforce our stance that the

demand trends, order book and deal velocity hint at sanguine FY20E revenue

growth for the sector. Pockets of weak BFS may drive marginal, but not

meaningful deceleration. As we cited in our recent note, it is margins that pose a

risk to earnings growth this fiscal and 1QFY20 performance may drive some

moderation in.

Ashish Chopra

– Research analyst

(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530

Research Analyst: Anmol Garg

(Anmol.Garg@MotilalOswal.com); +91 22 7193 4271 /

Mohit Sharma

(Mohit.Sharma@MotilalOswal.com)

27 July 2019

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Sector Update | Technology

3QFY19 performance highlights

Revenue 60bp ahead of consensus



Accenture’s 3QFY19 revenue grew 8.4% YoY CC to USD11.1b, exceeding the

consensus estimate of USD11.0b by 60bp, and at the higher end of its guidance

of USD10.8-11.1b.

Consulting

grew 7% YoY CC, while

Outsourcing

grew 10% YoY CC.

New bookings

stood at USD10.6b (v/s USD11.8b in 2QFY19) and reflect a

negative 4% foreign currency impact compared with new bookings of USD11.8b

in 3QFY18. Consulting new bookings stood at USD6.0b (57% of total bookings).

Operating margin

of 15.5% grew 20bp YoY, exceeding the consensus estimate

by 7bp.

BFSI revives; traction in growth markets remain strong



Products, the largest operating division, grew 8% YoY CC while Resources grew

19% YoY CC. BFSI grew 4% YoY CC and Communications, Media & Technology

grew 7% YoY CC.

Revenue from North America increased 9% YoY CC, while that from Europe grew

5% YoY CC. Growth markets grew 13% YoY CC, after +16% in 2QFY19.

Exhibit 1:

Growth in BFSI, led by double-digit growth in Insurance

25%

20%

15%

10%

CMT

BFSI

HPS

Products

Resources

Source: Company, MOFSL

Guidance improved:



The company raised its full-year revenue growth guidance band to 8-9% from

6.5-8.5% previously. ACN expects operating margin for the full year at 14.6%

(+20bp from FY18). Consensus margin estimate also stands at 14.6%.

Acquisitions are expected to contribute ~2pp to growth, implying organic

growth estimate of 6-7% YoY CC.

For

4QFY19,

ACN has a revenue guidance of USD10.85-11.15b, implying growth

of 5-8% YoY CC. Consensus estimate stands at USD11.0b – in the middle of the

guided band.

27 July 2019

Sector Update | Technology

Exhibit 2:

Lumpiness in net new bookings

New Bookings (USD B)

9.2

9.8 10.1 10.0 10.3

11.8

YoY Growth

10.8 10.2

11.8

10.6

Exhibit 3:

… and in both Consulting and Outsourcing

Consulting (USD B)

4.9

5.2

5.1

5.9

5.7

Outsourcing (USD B)

5.9

6.1

5.9

6.7

6.0

8.3

4.6

3.4

4.6

5.0

4.1

4.6

5.8

4.7

4.3

5.1

4.6

Source: Company, MOFSL

27 July 2019

Sector Update | Technology

NOTES

27 July 2019

Sector Update | Technology

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the

inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.

Disclosures

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

Motilal Oswal Securities Ltd. (MOSL)* is a SEBI Registered Research Analyst having registration no. INH000000412. MOSL, the Research Entity (RE) as defined in the

Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial

products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed public company, the details in respect of which are available on

www.motilaloswal.com.

MOSL is registered with the Securities & Exchange Board of India (SEBI) and is a registered Trading Member with National Stock Exchange of India Ltd.

(NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India (MCX) & National Commodity & Derivatives Exchange Ltd. (NCDEX) for its stock broking

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buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other

compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have

any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the

specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even

though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report

MOSL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should

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Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state

laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together

with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment

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The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S.

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appearances and trading securities held by a research analyst account.

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In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets

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Specific Disclosures

1 MOSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.

2 MOSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

6 MOSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

7 MOSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months

8 MOSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months

9 MOSL has not received any compensation or other benefits from third party in connection with the research report

10 MOSL has not engaged in market making activity for the subject company

****************************************************************

27 July 2019

Sector Update | Technology

The associates of MOSL may have:

financial interest in the subject company

actual/beneficial ownership of 1% or more securities in the subject company

received compensation/other benefits from the subject company in the past 12 months

other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever

on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of

MOSL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the

company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)

received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.

The associates of MOSL has not received any compensation or other benefits from third party in connection with the research report

Above disclosures include beneficial holdings lying in demat account of MOSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not

consider demat accounts which are opened in name of MOSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOSL also earns DP income from

clients which are not considered in above disclosures.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

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may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent

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The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,

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report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOSL will not treat recipients as

customers by virtue of their receiving this report.

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The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

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The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

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the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and

should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make

modifications and alternations to this statement as may be required from time to time without any prior approval. MOSL, its associates, their directors and the employees may from

time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to

perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a

separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

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Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980

4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080

1000. Compliance Officer: Neeraj Agarwal, Email Id:

na@motilaloswal.com,

Contact No.:022-38281085.

Registration details: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412.

AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual

Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd.

is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. *Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate

products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.

27 July 2019