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Indian IT Services
Positive read-across for Indian IT from Accenture results
Strong consulting bookings and pipeline suggest higher
client confidence; Accenture raises full-year guidance in 1Q
We expect discretionary spending to accelerate in 2011 as
clients invest in growth and not just cost rationalisation
Positive for Indian IT sector: Expect strong earnings growth
in FY12 led by robust volume growth and stable margins
Accenture (ACN US, Not Rated) reported a strong 1QFY11 (November 2010 ending), led by
improving client confidence to invest in growth and not just cost rationalisation. The company
raised its full-year guidance to 8-11% growth from 7-10% y-o-y. Its commentary on the
demand environment reinforces our expectation of a pick-up in discretionary spending in 2011
and continued growth momentum for the Indian IT sector.
Accenture results
Consulting bookings, a lead indicator for IT Services spend, were at a 10-quarter high
with qualified pipeline up 25% y-o-y. IT consulting demand for rationalisation of legacy
systems, data centre consolidation and application modernization was strong.
SAP implementation (systems integration – SI) and platform rationalisation demand
improved materially along with an accelerated trend of offshoring of SI work.
While demand from the banking sector continued to be led by M&A integration, risks and
compliance and re-platforming work, there were early signs of improvement in the
telecom market as service providers invest in customer retention and growing wireless
product demand.
The company added 7,000 net employees this quarter and saw attrition trend down 200bp
to 15%, perhaps an early sign of a stabilising supply market.
Indian IT sector outlook
We believe 2011 will remain a positive year for Indian IT, which we estimate will report
robust earnings growth of 20%. Earnings should be positively influenced by revenue
growth of 23-25% (USD terms), stable EBITDA margins and a one-time increase in the
tax rate (due to STPI tax exemption sunset). Sector top-line growth should benefit from
the continued striving for cost optimisation by clients, resulting in an increase in
offshoring and a revival in discretionary spending as clients look to invest in growth and
required IT systems. In view of the robust earnings growth outlook, we believe current
valuations are not stretched and stock returns should be at least in line with earnings
growth (refer to Valuation summary for more detail).
Accenture results at a glance
Accenture reported 1QFY11 revenues of USD6.1bn, up 14% y-o-y in constant currency and up c11% qo-q in reported currency (USD). Outsourcing revenues were up 6.4% q-o-q at USD2.48bn and consulting
revenues were up 15.5% q-o-q yielding USD3.57bn. Total new bookings were USD6.3bn compared to
USD6.5bn last quarter, with the total book-to-bill ratio at 1.0x compared to 1.2x last quarter. New
bookings in outsourcing were USD2.6bn and USD3.7bn in consulting with the book-to-bill ratio at 1.0x
versus 1.3x last quarter for outsourcing and 1.0x versus 1.1x in the previous quarter for consulting.
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