Technology: Accenture-tightens revenue growth guidance band - Kotak

Accenture reported c/c revenue growth of 7% for May 2017 (3QFY17) quarter, at the upper-end of guidance band. However, the company tightened FY2017 revenue growth guidance band to 6-7% from 6-8% earlier with the tightening capturing slower-than-expected initiation of new projects due to continued uncertainty on healthcare legislation in the US. Outsourcing business outpaced consulting growth for the second consecutive quarter. The results do not lend any incremental insights into FY2018 demand potential for Indian IT.

Outsourcing growth outpaces consulting for the second consecutive quarter

Accenture reported c/c revenue growth of 7% yoy for May 2017 quarter (Accenture has August financial year-end). Revenue growth was at the upper end of the guidance band with acquisitions contributing ~2.5% to revenues. Revenue growth was robust in the Products vertical at 15% in c/c, while it was muted at 2% in Health and Public Services. New bookings grew 8% yoy to US$9.8 bn, impressive overall. Contrary to management expectations, outsourcing business growth outpaced consulting growth for the second consecutive quarter.

FY2017 revenue growth guidance band tightened to 6-7% from 6-8% earlier

Accenture expects acquisitions to contribute ~2% to overall revenues in FY2017. Implied organic growth stands at 4-5% in c/c. The cut captures slower-than-expected growth in Health & Public Service vertical. This is largely on account of continuing uncertainty around healthcare legislation and state and federal budgets in the US. Management outlook for other parts of the business is robust and unchanged from earlier quarters.

Applications growth accelerates while strategy & consulting growth moderates

An interesting aspect of Accenture's performance is acceleration in application services growth to high-single digits from mid-single digits in the previous year and deceleration in strategy and consulting growth. Do note that application service is a large portfolio of business for Indian IT that has seen perceptible slowdown in growth rate with fears of commoditization and secular decline in this business. Accenture management indicated that drivers for growth have been systems integration, application engineering and implementation of digital technologies. We would watch this dynamic closely as the strength of Indian IT is in the applications space, an area that has suffered due to reallocation of client spends towards consulting in the past two-three years. Any broader shift in the market towards implementation work can have positive impact on the growth of Indian IT.

Read through for Indian IT-no direct impact but some evidence of slowdown seen

While not directly evidenced from Accenture's results, the fact remains that growth rates have moderated for most IT services companies globally. Each company has a different pain point (healthcare, retail and materials and resources are the most cited ones) but at an aggregate level this has meant lower growth rate for services companies.

We expect Indian IT growth challenges to continue in the near term, led by a combination of slow pace of deal closures, continuing captive shift, lack of much anticipated kicker to financial services spending and share gain by consulting firms in digital spending. These factors will impact FY2018E industry growth.

Per person metrics continue to be under pressure

Revenue/employee (ttm) declined 4% yoy to US$86,895, while EBIT/ person was down 3.2% to US$12,812. The decline is steeper at 12% and 9% for revenue/ employee and EBIT/ employee when compared to numbers two years back. The broader trend of shift of operations to low-cost locations and currency headwind is the larger reason over the past two years, but the decline should have been lesser noting-(1) faster growth in consulting and higher-realization in digital services and (2) benefits of automation in traditional services.

Sharp increase in non-GDN headcount

After a long time, the company has added aggressively to its non-GDN headcount. Non-GDN headcount increased by 4,232 in the quarter. GDN headcount's contribution declined 40 bps qoq to 74.8% of employees which could essentially be a quarterly blip.

Source : Equity Bulls

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