The IT sector has had a rough couple of years, but recent developments suggest a potential turnaround. Following the release of Accenture’s Q3 results, Indian IT stocks, including heavyweights like TCS and Infosys, saw a significant uptick. So, is the worst really over for tech firms? Let’s dive into the details.
Accenture Q3 results: A silver lining
Accenture Q3 financial results revealed a slight dip in revenue, dropping 1% year-over-year to $16.5 billion. Despite this, there were positive indicators: new bookings soared by 22% to $21.1 billion, driven partly by substantial investments in generative AI, which accounted for $900 million of the new bookings.
Accenture’s managed services revenue increased by 2% to $8 billion, while consulting revenue stood at $8.5 billion. Although the company reduced its full-year revenue outlook to a growth range of 1.5% to 2.5%, down from the previous 1% to 3%, the market responded positively.
Impact on Indian IT stocks
Following Accenture’s earnings report, Indian IT stocks surged. The Nifty IT index jumped nearly 3%, outperforming the broader Nifty 50 index, which rose by about 0.4%. Early trading on June 21 saw notable gains for several Indian IT companies:
- Persistent Systems: Up over 3%
- LTIMindtree: Up over 3%
- Coforge: Up over 3%
- Infosys: Up 1.93% to ₹1,544.70
- TCS: Up 2.32% to ₹3,875
- HCL Tech: Up 2.52% to ₹1,479.80
This uptick comes on the back of a 30% gain in the Nifty IT index over the past two years, compared to a 54% rise in the Nifty 50.
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Why are IT stocks gaining?
Indian IT stocks often mirror the performance of global players like Accenture, which serves as a bellwether for the sector. Accenture’s Q3 results, with strong bookings and growth in managed services, suggest a potential stabilisation in demand for IT services.
Experts from Kotak Institutional Equities noted that despite a muted demand environment in recent quarters, Indian IT stocks have remained resilient. They pointed out that Accenture’s positive elements, such as strong booking growth and an acceleration in year-on-year growth rates, could spur optimism among investors.
Outlook for Indian IT companies
Analysts have mixed views on the future performance of Indian IT companies. While there is cautious optimism, some concerns remain. Emkay Global Financial Services highlighted Accenture’s steady Q4 guidance of 2-6% growth in local currency as a positive sign for Indian IT firms. They anticipate a full-fledged recovery by CY25/FY26, driven by factors like potential interest rate cuts that could boost discretionary spending.
However, Nirmal Bang’s analysis suggests that while there are positive signals, the outlook remains uncertain. They noted that Accenture’s reduced revenue growth guidance reflects ongoing challenges in the demand environment. Discretionary spending continues to be subdued, and decision-making remains slow.
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Mid-tier IT companies under pressure
While larger IT firms like TCS and Infosys are expected to benefit from Accenture’s performance, mid-tier companies might face challenges. Analysts predict that the competition for large deals will intensify, potentially sidelining smaller players. This trend is driven by a tough macroeconomic environment where cost takeout deals typically favour larger companies.
Experts’ take on the IT sector
Morgan Stanley offered a cautiously optimistic view, noting positive data points in Accenture’s results, such as a return to growth in strategy and consulting. They believe that the growth rates for Indian IT services companies are bottoming out, although the recovery will likely be gradual.
Nuvama Institutional Equities maintained a positive stance, expecting strong demand to drive healthy earnings growth over the next three years. They pointed out that Accenture’s management sees consulting returning to growth in Q4, which bodes well for Indian IT companies.
On the flip side, Nirmal Bang remains wary. They emphasise that the demand conditions have not changed significantly and that pricing pressure persists across the business. They maintain an “underweight” stance on the Indian IT services sector, suggesting that a full recovery might take longer than anticipated.
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What does this mean for investors?
For investors, the recent rally in IT stocks signals cautious optimism. While the sector has faced headwinds, the positive indicators from Accenture’s Q3 results provide hope for a potential turnaround. However, it’s essential to keep an eye on broader economic factors, such as interest rates and discretionary spending trends, which will play a crucial role in shaping the sector’s future.
Conclusion: A mixed bag with cautious optimism
In conclusion, the recent jump in Indian IT stocks following Accenture’s Q3 results is a positive sign, but it’s too early to declare a full recovery. While larger players like TCS and Infosys are well-positioned to benefit from stabilising demand, mid-tier companies might face challenges. Investors should stay informed and watch for further developments in the sector, balancing optimism with caution.
