Technology

Sector Update | 25 June 2020

Technology

Accenture – Encouraging tone to kick off earnings season

Positive and negative read-through for Indian IT sector

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Stock covered

TCS

Infosys

Wipro

HCL Technologies

Tech Mahindra

LTI

Mphasis

Hexaware

Mindtree

Cyient

Persistent

NIIT Technologies

Zensar

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Stronger-than-expected results/commentary of Accenture sets an encouraging

tone for the impending earnings season for Indian IT. This time, Accenture’s

3QFY20 comprising Mar-May’20 (MAM) is the most severely disrupted due to

the COVID-19 pandemic. Despite this, the impressive performance and new deal

bookings epitomize the resilience and adaptability of Accenture’s business

model. Healthy growth in Italy (8% YoY, CC) bears testimony to this.

The company’s FY20 growth guidance at end of 2QFY20 (3-6% YoY, CC) came in

a tad earlier than the announcement of lockdowns across a significant part of

the globe (refer

our earlier note).

Thus, the street anticipating big miss for the

quarter and significant downgrade for FY20 guidance was a natural occurrence.

However, Accenture’s growth during 3QFY20 (higher end of the guidance band)

and narrowing of the earlier guidance band (3.5-4.5% YoY, CC) is a key positive

read-through for the sector.

More relevant to Indian IT is the trend in outsourcing revenue, which grew 5%

YoY (v/s overall growth of 1.3% YoY, CC). Even new bookings in the outsourcing

segment witnessed strong increase (8% YoY, CC) with most sales and signings

happening virtually. Management indicated that the pipeline for 4Q is very

robust and should translate into robust bookings in the next quarter.

Despite the lockdowns and shift to Work from Home (WFH), drop in utilization

(300bp QoQ to 88%) was not damaging. Operating margin expansion (220bp

QoQ; 10bp YoY) should also calm the nerves of Indian IT investors on concerns

around meaningful margin displacement due to factors like pricing pressure, etc.

While most trends are positive takeaways for Indian IT, we are also cognizant of

the fact that Health & Public Services (12% YoY, CC) vertical was the biggest

growth driver given the sharp increase in projects like the COVID-19 contact

tracing apps, etc. It should be noted that Healthcare vertical for Indian IT players

(TCS – 8%, Infosys – 6%, Wipro – 13%, HCLT – 13%) is not as big as that of

Accenture (18% of revenue). In addition, growth markets (20% of revenue)

remained a key growth driver for Accenture, which again is not a big and reliable

segment for Indian companies. Accordingly, we maintain a cautious stance on

extrapolating the positivity in its entirety for Indian companies.

Even as management indicated that WFH is proving to be more efficient in some

cases, they also hinted at some challenges in ER&D for people to collaborate.

We foresee similar roadblocks for Indian companies with high exposure to ER&D

(e.g. HCLT, Wipro, LTTS, Cyient, etc.).

Highlights from management commentary

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The company had strong momentum in March. However, the pandemic led to

clients delaying decisions and deferring work during April and May.

Nevertheless, Accenture informed there is no increase in project cancellations.

Accenture alluded to improvement in overall business environment with more

client engagements happening.

Sudheer Guntupalli – Research analyst

(Sudheer.Guntupalli@MotilalOswal.com); +91 22 5036 2749

Research analyst: Mohit Sharma

(Mohit.Sharma@MotilalOswal.com); +91226129 1531/

Heenal Gada

(Heenal.Gada@MotilalOswal.com); +91225036 2654

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

25 June 2020

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

Technology

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Despite moderation in IT spending, the company sees a surge in demand for

digital. Going forward, Accenture anticipates acceleration in adoption of Cloud,

Security and Operations. Digital manufacturing and supply chain are other

areas, which are witnessing strong client traction.

Business in areas like Intelligent Platforms moderated and may witness further

moderation going forward.

Margin improvement during the quarter had come due to aggressive cost

optimization measures and reduction in non-billable travel expenses.

Valuation and view – Reiteration of business model’s adaptability

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We see Accenture’s results and commentary as a mere re-iteration of the

adaptability and resilience of the business model. This should partly alleviate the

concerns of Indian IT investors around the potential disruption to operations,

business continuity and new deal wins.

Despite near-term uncertainties due to COVID-19 and the US Presidential

elections, we continue to like Infosys/TCS/HCLT among Tier I and LTI/Mindtree

among Tier II. This is attributable to their robust business models, high return

ratios, strong management teams and reasonable valuations.

These companies have the legacy of overcoming multiple business challenges

and technology change cycles in the past. Accordingly, we believe they will be

able to adapt and overcome any transient challenges posed by COVID-19.

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Technology

Story in charts

Exhibit 1:

Revenue growth surprising

10%

Exhibit 2:

Flattish revenue in communications vertical

Communication, Media & Tech (YoY CC)

8%

14%

12%

7%

1%

5%

7%

5%

0%

9%

Overall (YoY CC)

9%

8%

7%

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 3:

Flattish revenue in financial services

Financial services (YoY CC)

6%

4%

1%

2%

4%

3%

0%

Exhibit 4:

Growth was entirely driven by healthcare vertical

Health & Public services (YoY CC)

13%

5%

3%

6%

8%

15%

12%

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 5:

Products and resources verticals reported…

Products (YoY CC)

10%

10%

8%

8%

12%

10%

-1%

Exhibit 6:

…YoY decline in revenue

Resources (YoY CC)

21%

22%

19%

12%

7%

5%

-3%

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 7:

While Americas reported marginal growth…

Americas (YoY CC)

10%

8%

9%

8%

9%

11%

Exhibit 8:

…revenue from Europe reported slight decline

Europe (YoY CC)

6%

7%

5%

7%

4%

2%

-2%

2%

Source: Company, MOFSL

Source: Company, MOFSL

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Technology

Exhibit 9:

Growth markets were the key growth driver

Growth markets (YoY CC)

17%

16%

13%

12%

13%

11%

5%

Exhibit 10:

Healthy increase in new bookings

New bookings (YoY USD)

15%

2%

-10%

19%

1%

21%

4%

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 11:

Except for lumpiness, new bookings were good

New bookings (USD bn)

13

11

10

14

11

Exhibit 12:

Healthy improvement in margins

Operating margins

15%

13%

15%

14%

13%

16%

16%

10

12

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 13:

Book to bill ratio remained healthy

New book-to-bill ratio

1.0

1.1

1.2

1.0

0.9

1.1

1.0

Exhibit 14:

No material displacement in utilizations

Utilizations

92%

91%

91%

91%

91%

91%

88%

Source: Company, MOFSL

Source: Company, MOFSL

Exhibit 15:

Share of outsourcing revenue witnessed marginal increase

Consulting

Outsourcing

44%

45%

44%

44%

44%

45%

45%

56%

55%

56%

56%

56%

55%

55%

Source: Company, MOFSL

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Technology

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Expected return (over 12-month)

BUY

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SELL

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Technology

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