India IT Services: Strong 3QFY11 results from Accenture point to healthy demand environment for Indian IT:: JPMorgan

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 Accenture (covered by our US IT analyst Tien-Tsin Huang) reported a robust
Q3 meaningfully ahead of consensus and J.P. Morgan (revenue) estimates,
pointing to continued healthy spending environment. The company reported
impressive  revenue  growth and bookings  for both consulting and  outsourcing
businesses.  Management  suggested  that  discretionary  spending  continues  to
grow  and  macro  economic  concerns  do  not  seem  to  have  impacted  clients’
willingness/ability to invest for future growth. Public sector revenues were light,
which is  understandable  given  difficult  fiscal  situation  (in the US  and  certain
European countries); however it is not likely to impact overall revenue growth
meaningfully.  Management  pointed  out  that  clients  continue  to  spend  to
position  themselves  for  global  opportunities,  to  be  compliant  with  new
regulations,  to  increase  efficiency  to  remain  competitive  and  to  build
capabilities in themes like cloud, analytics and mobility.
 Strong  revenue  growth  and  bookings  point  to  healthy  demand
environment. Accenture  reported  impressive  Q3  revenues  of  $6.7  bn,
significantly ahead of consensus estimate of $6.4 bn and upper end of guidance
($6.5  bn).  Consulting  revenues  were  particularly  robust (growing  17% y/y in
local currency and 23% y/y in USD) pointing to strong discretionary spending,
while Outsourcing business was healthy with 12% y/y revenue growth in local
currency (17% in USD). Bookings were strong (particularly for outsourcing) at
$7.1 bn, and positively, the company guided  for even stronger booking (about
$8 bn) next quarter (management is likely to have significant visibility for next
quarter  bookings  now). Notably,  BFSI growth  (which  had  some  concerns
regarding  sustainability  of  growth) was impressive  (19% in local currency) as
acquisition  integration  and  compliance  projects  continue  to  grow,  this  bodes
well for TCS & Cognizant, which derive over 40% of their revenues from BFSI.
This also helps assuage concerns that BFSI spending might be slowing down.
 Discretionary  spending  continues  to  grow. Management  suggested  that
system  integration  work  exhibited  strong  growth  driven  by  ERP  for  helping
global expansion and for data management and analytics. The driving factors for
consulting  growth  include intent to  target  new  opportunities,  revenue  growth
and rationalization of infrastructure utilizing virtualization and consolidation.
 Globalization, increased regulation, efficiency focus and themes are driving
spending  growth  despite  weak  macro  environment.  Weakening  consumer
spending (particularly in the US) and macroeconomic concerns do not seem to
have  impacted  enterprise  spending,  which  drives IT  industry  revenues.  Most
clients of IT services vendors are G2000 companies, which continue to invest in
new markets/geographies, need to be compliant with new regulations, invest for
operational  efficiency to  remain  competitive and  in  themes such  as  cloud,
mobility and analytics. Moreover, these companies have meaningful exposure to
emerging markets where growth has not meaningfully slowed down.
 Accenture  results  point  to  strong  growth  for  Indian  IT  companies. We
believe the  healthy  spending  environment  augurs  well  for revenue  growth for
Indian  IT. We  retain our  positive  bias  towards  the  sector with OW  on  TCS,
Wipro and HCL Technologies.