Accenture’s Downgraded Guidance Casts Shadow on India’s IT Sector

The Indian IT sector, a major contributor to the country’s economy, is facing headwinds after global IT major Accenture cut its full-year revenue growth forecast for the fiscal year ending August 2024. This revision has sent shockwaves through the industry, leading to a sharp decline in Indian IT stocks.

Reacting to this news, The Nifty IT index started the day with a significant drop, opening more than 3.46 percent lower at 35,256.6 compared to the previous day’s closing of 36,026.8. All stocks within the index experienced notable declines around 9:30 am. The largest decreases were seen in HCL Tech, Mphasis, and Persistent Systems. Additionally, the Nifty IT index fell below its 100-day moving average (DMA), reaching its lowest point in two months, marking the biggest weekly decline in over a year.

Accenture’s Mixed Performance and Downgraded Guidance

Accenture’s latest financial results presented a mixed bag. While the company’s earnings per share (EPS) for Q2 witnessed a year-over-year increase to USD 2.63 from USD 2.39, revenue for the same period fell slightly short of analyst expectations, coming in at USD 15.80 billion compared to the anticipated USD 15.82 billion.

The bigger concern lies in the company’s downgraded outlook. Accenture lowered its revenue guidance for Q3 to a range of USD 16.25 billion to USD 16.85 billion, falling below market estimates of USD 17.03 billion. This translates to a potential flat growth or a slight increase (between -1% to +3%) compared to Q3 of the previous year. Similarly, the company’s full-year revenue growth projection was revised downwards to a range of 1% to 3%, a more conservative outlook compared to the earlier estimate of 2% to 5%.

Indian IT Stocks Tumble on Uncertainty

The Indian IT sector reacted swiftly and harshly to Accenture’s downgraded guidance. All constituents of the index faced deep cuts, with some like HCL Tech, Mphasis, and Persistent Systems plummeting over 4% each. This decline extended to mid-cap and small-cap IT companies as well, with several experiencing drops between 2% and 4%.

During the opening trade, Leading companies such as HCL Technologies witnessed a 5.31% decrease in their share prices, while Wipro and LTIMindtree experienced declines exceeding 3%. Infosys and Tech Mahindra also faced losses, with their share prices dropping by 3.3% and 3.08% respectively. This widespread sell-off highlights the deep concern and uncertainty surrounding the industry’s near-term prospects.

Mixed Analyst Views on the Sector’s Future

Financial experts hold varying opinions on the future of the Indian IT sector in the wake of Accenture’s guidance cut. Some analysts believe this is a temporary setback, with strong demand anticipated to drive growth over the next few years. They point to positive signs like healthy outsourcing activity and deal bookings.

However, other analysts express a more cautious stance, worried about the impact of weak discretionary spending on near-term performance. They predict a shift in focus towards cost-cutting projects, potentially benefiting large-cap IT companies due to their more attractive valuations. Overall, analysts foresee a potential downward revision of earnings estimates in the short term, with large-cap companies possibly faring better due to their cost-optimization expertise.

Recovery Signs Emerge Despite Initial Shock

Despite the significant decline in the Nifty IT index, it managed to bounce back from its lowest point during the day, reaching a level of 35,377.10, up by approximately 675 points from its intraday low of 34,701.75. Although the near-term outlook remains uncertain, this modest recovery provides a ray of optimism.

Conclusion

Accenture’s downgraded guidance has undoubtedly cast a shadow over India’s IT sector. The industry is likely to face a period of adjustment as it grapples with economic uncertainty, cautious client spending, and a potential shift towards cost-focused projects. However, the long-term outlook remains promising, with strong outsourcing activity and healthy deal bookings suggesting continued growth potential. How the sector navigates these short-term challenges will be crucial in determining its future trajectory.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.