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Indian IT Services
Accenture results bode well for Indian IT sector
Accenture’s upgrade of full-year guidance and bullish
outlook on outsourcing services is a positive sign
It is tough to ascertain at this stage if it is market share
gains; margin fall in business from banking raises concerns
Overall, results reduce the probability of a weak demand
scenario; positive for stocks, such as TCS, rated OW, which
have underperformed in the past few weeks
Accenture’s good 2Q results (February ending), upgrade of its full-year guidance, and bullish
outlook on outsourcing services, particularly from the banking industry, bode well for Indian
IT companies. Earlier in the week, Oracle’s 3Q (February ending quarter) results reinforced the
view that there is no gloom and doom out there. The company, as promised, reported a good
come back in 3Q results, after a dismal performance in 2Q. It appears that last quarter’s
weakness was led by under-investment in sales and not macro weakness, as license sales this
quarter were accompanied by a significant increase in sales team size.
While it is too early to say if Accenture was more aggressive on pricing and gaining market
share from Indian companies, as evidenced by the fall in margins in this business, the company
was certainly positive on the demand outlook. Overall, the results should reduce the probability
of a weak demand scenario (single-digit growth in FY13) and may result, in our view, in an
up-tick in stocks, such as TCS, rated OW, which have underperformed in the past few weeks.
Highlight of Accenture results has been the increase in FY12 guidance from the previous
7-10% constant currency revenue growth to the current estimate of 10-12%. The company
continues to expect bookings to come in at USD28-31bn. The guidance for 3Q12 also beats the
Street estimates, with revenues of USD7.05-7.25bn against consensus of USD7.08bn.
Accenture was up 2.25 % in after-market trading. The company plans to hire more than 60,000
people around the world in 2012. Current headcount stands at 246,000, with 12% attrition,
excluding involuntary terminations.
Outsourcing in BFSI grew strongly – market share gains or market expansion? Accenture
is seeing strong demand for its outsourcing services, largely led by its clients’ cost-cutting
initiatives. So, while consulting growth is slowing, outsourcing services have remained
resilient. Particularly noteworthy was the strong growth of outsourcing services in banking
financial services and insurance (BFSI), which is the key market for Indian IT companies. It is
hard to say at this stage if Accenture gained market share or the market expanded. Operating
margins for financial services dropped to 10% from 16% in 2Q11 y-o-y and 14% q-o-q, while
the overall group margin improved to 13.5% from 13.2% y-o-y.
Accenture reported revenues of USD6.8bn, growing 12% y-o-y in 2Q12, above the consensus estimate of
USD6.7bn, and meeting the upper end of its quarter guidance. The consulting division’s revenues grew
8% y-o-y in constant currency terms, although on a sequential basis in USD terms revenues declined by
7.9% q-o-q. Importantly, the outsourcing division’s revenues grew by a strong 20% y-o-y in constant
currency terms and experienced an increase in overall bookings that grew at 22.4% y-o-y. Bookings in the
consulting division grew 6.6% y-o-y. The overall book-to-bill ratio improved to 1.2x from 1.1x in 1Q12.
Geographic performance: IT spending in the Americas grew 15% y-o-y, showing some early signs of
improvement. Europe has been resilient as well, at +10% in constant currency terms. Management was
caution on the European financial services sector. APAC continued to show strong growth at +20% y-o-y
in constant currency terms.
Accenture growth is a leading indicator for Indian IT companies: Accenture derives nearly 15% of its
revenues from management consulting and also has higher exposure to Oracle and SAP implementation
services compared to Indian IT companies. These are transactional services, and therefore more cyclical
than annuity-based maintenance services. Therefore, we believe Accenture should see its consulting
revenues impacted earlier in the cycle than the overall demand for IT services.
Oracle’s 3Q12 results
Oracle reported license sale growth of 3% y-o-y (in constant currency terms) for its application business
and 10% y-o-y (in constant currency terms) for its database and middleware business. Overall new
software license revenues were USD1,716m, up 9% y-o-y, at top end of the estimate of 0-10% growth
guided to last quarter. For 4Q12, new software license revenue growth is expected to be 1% up to 11% up
in constant currency terms. President and CFO Safra Catz said that she is not seeing anything negative or
otherwise, and guidance for 4Q12 is conservative due to a setback in 2Q12 and high growth in 4Q11.
Geographic performance: New license sales in North America grew 11% y-o-y in constant currency
terms, JPAC (Japan and Asia Pacific) grew 11% y-o-y (in constant currency terms), and EMEA was flat.
However, a few aspects still remain concerning. While there is no extreme cut in spending, growth
remains moderated. 4Q guidance is just about in double digits. Additionally, application license sales
were a muted 3% this quarter. Growth was much stronger in databases at 10% y-o-y. Usually,
applications create a much stronger downstream revenue opportunity for Indian IT companies compared
to databases. Overall, Oracle results suggest that demand and IT spending are steady and clients are still
spending where they see value.
Valuation and risks
TCS (TCS.BO; INR1,168; Overweight; TP INR1,365)
Valuation: TCS is currently trading at nearly 19x FY13e EPS. We value the company at 20x our
December 2013 annualised earnings, with a target price of INR1,365.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for India stocks of 11%. Our target price of INR1,365 implies a potential return of
19.6% (including forecast dividend yield), above the Neutral band; therefore, we are reiterating our
Overweight rating. Potential return equals the percentage difference between the current share price and
the target price, including the forecast dividend yield when indicated.
Risks: Deterioration in macroeconomic conditions is a primary risk, which may result in a delay in
decision-making and, therefore, project ramp-ups. The appreciation of the INR against the USD is one of
the key risks to our estimates. Although management is confident of maintaining an EBIT margin of
around 27%, even if the rupee appreciates to 46, any appreciation of the INR would impact sentiment and
stock valuation, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian IT Services
Accenture results bode well for Indian IT sector
Accenture’s upgrade of full-year guidance and bullish
outlook on outsourcing services is a positive sign
It is tough to ascertain at this stage if it is market share
gains; margin fall in business from banking raises concerns
Overall, results reduce the probability of a weak demand
scenario; positive for stocks, such as TCS, rated OW, which
have underperformed in the past few weeks
Accenture’s good 2Q results (February ending), upgrade of its full-year guidance, and bullish
outlook on outsourcing services, particularly from the banking industry, bode well for Indian
IT companies. Earlier in the week, Oracle’s 3Q (February ending quarter) results reinforced the
view that there is no gloom and doom out there. The company, as promised, reported a good
come back in 3Q results, after a dismal performance in 2Q. It appears that last quarter’s
weakness was led by under-investment in sales and not macro weakness, as license sales this
quarter were accompanied by a significant increase in sales team size.
While it is too early to say if Accenture was more aggressive on pricing and gaining market
share from Indian companies, as evidenced by the fall in margins in this business, the company
was certainly positive on the demand outlook. Overall, the results should reduce the probability
of a weak demand scenario (single-digit growth in FY13) and may result, in our view, in an
up-tick in stocks, such as TCS, rated OW, which have underperformed in the past few weeks.
Highlight of Accenture results has been the increase in FY12 guidance from the previous
7-10% constant currency revenue growth to the current estimate of 10-12%. The company
continues to expect bookings to come in at USD28-31bn. The guidance for 3Q12 also beats the
Street estimates, with revenues of USD7.05-7.25bn against consensus of USD7.08bn.
Accenture was up 2.25 % in after-market trading. The company plans to hire more than 60,000
people around the world in 2012. Current headcount stands at 246,000, with 12% attrition,
excluding involuntary terminations.
Outsourcing in BFSI grew strongly – market share gains or market expansion? Accenture
is seeing strong demand for its outsourcing services, largely led by its clients’ cost-cutting
initiatives. So, while consulting growth is slowing, outsourcing services have remained
resilient. Particularly noteworthy was the strong growth of outsourcing services in banking
financial services and insurance (BFSI), which is the key market for Indian IT companies. It is
hard to say at this stage if Accenture gained market share or the market expanded. Operating
margins for financial services dropped to 10% from 16% in 2Q11 y-o-y and 14% q-o-q, while
the overall group margin improved to 13.5% from 13.2% y-o-y.
Accenture reported revenues of USD6.8bn, growing 12% y-o-y in 2Q12, above the consensus estimate of
USD6.7bn, and meeting the upper end of its quarter guidance. The consulting division’s revenues grew
8% y-o-y in constant currency terms, although on a sequential basis in USD terms revenues declined by
7.9% q-o-q. Importantly, the outsourcing division’s revenues grew by a strong 20% y-o-y in constant
currency terms and experienced an increase in overall bookings that grew at 22.4% y-o-y. Bookings in the
consulting division grew 6.6% y-o-y. The overall book-to-bill ratio improved to 1.2x from 1.1x in 1Q12.
Geographic performance: IT spending in the Americas grew 15% y-o-y, showing some early signs of
improvement. Europe has been resilient as well, at +10% in constant currency terms. Management was
caution on the European financial services sector. APAC continued to show strong growth at +20% y-o-y
in constant currency terms.
Accenture growth is a leading indicator for Indian IT companies: Accenture derives nearly 15% of its
revenues from management consulting and also has higher exposure to Oracle and SAP implementation
services compared to Indian IT companies. These are transactional services, and therefore more cyclical
than annuity-based maintenance services. Therefore, we believe Accenture should see its consulting
revenues impacted earlier in the cycle than the overall demand for IT services.
Oracle’s 3Q12 results
Oracle reported license sale growth of 3% y-o-y (in constant currency terms) for its application business
and 10% y-o-y (in constant currency terms) for its database and middleware business. Overall new
software license revenues were USD1,716m, up 9% y-o-y, at top end of the estimate of 0-10% growth
guided to last quarter. For 4Q12, new software license revenue growth is expected to be 1% up to 11% up
in constant currency terms. President and CFO Safra Catz said that she is not seeing anything negative or
otherwise, and guidance for 4Q12 is conservative due to a setback in 2Q12 and high growth in 4Q11.
Geographic performance: New license sales in North America grew 11% y-o-y in constant currency
terms, JPAC (Japan and Asia Pacific) grew 11% y-o-y (in constant currency terms), and EMEA was flat.
However, a few aspects still remain concerning. While there is no extreme cut in spending, growth
remains moderated. 4Q guidance is just about in double digits. Additionally, application license sales
were a muted 3% this quarter. Growth was much stronger in databases at 10% y-o-y. Usually,
applications create a much stronger downstream revenue opportunity for Indian IT companies compared
to databases. Overall, Oracle results suggest that demand and IT spending are steady and clients are still
spending where they see value.
Valuation and risks
TCS (TCS.BO; INR1,168; Overweight; TP INR1,365)
Valuation: TCS is currently trading at nearly 19x FY13e EPS. We value the company at 20x our
December 2013 annualised earnings, with a target price of INR1,365.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for India stocks of 11%. Our target price of INR1,365 implies a potential return of
19.6% (including forecast dividend yield), above the Neutral band; therefore, we are reiterating our
Overweight rating. Potential return equals the percentage difference between the current share price and
the target price, including the forecast dividend yield when indicated.
Risks: Deterioration in macroeconomic conditions is a primary risk, which may result in a delay in
decision-making and, therefore, project ramp-ups. The appreciation of the INR against the USD is one of
the key risks to our estimates. Although management is confident of maintaining an EBIT margin of
around 27%, even if the rupee appreciates to 46, any appreciation of the INR would impact sentiment and
stock valuation, in our view.
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