Software & Services share price target

Accenture (ACN) reported revenue growth of US$16.565bn, at mid-point of its guidance adjusted for FX. It revised its organic growth guidance from 6-8% to 6-7% YoY CC i.e. reduced mid-point of guidance by 50bps. Guidance implies 3% QoQ decline and 4% YoY growth in revenue in Aug’23 quarter.

We hosted IT sector experts – 1) Mr. Steven Hall President – EMEA & Partner - Digital Advisory Services, ISG and 2) Mr. Stanton Jones – Distinguished Research Analyst, ISG where we discussed key demand and tech trends playing out amidst an uncertain macro environment.

Indian IT - Precariously Placed in the near term: During Q4FY23, aggregate revenues of Top-5 IT firms declined by c.0.8% QoQ in cc terms. While revenues in Q4 were impacted mainly by QoQ decline in Communication and Technology verticals, growth across verticals moderated on a QoQ basis. America and Europe both witnessed declining revenue, indicating weakness across both the sub continents.

Coforge retained its guidance of 13-16% YoY CC growth for FY24. This guidance looks conservative vs 20% YoY growth in executable orderbook at the start of FY24 because management is building in more uncertain demand environment in FY24E.

We have analysed the just-concluded quarter results of global SaaS companies with whom Indian IT companies have sell-to and sell-with partnerships (Servicenow, Atlassian, Snowflake, Salesforce, Workday, etc.) and digital engineering companies (EPAM, Globant, Endava), which can be considered proxy for high-end digital services demand.

Several US and European retailers have highlighted that they are seeing consumer spending being impacted in discretionary categories. Walmart mentioned headline inflation in food and consumables declined by 400bps QoQ in Apr’23 quarter, but on a 2-year basis, food inflation remains over 20% and continues to put pressure on discretionary wallets.

Over the past year, the Indian software sector was rocked by a global slowdown, worsened by high inflation. The collapse of key US banks and Credit Suisse in March 2023 only exacerbated the situation for IT companies, which rely heavily on banking and finance clients for revenues.

Amid adverse macro environment for IT Services spending with right shifting of demand, as clients want to focus on critical areas of tech spending, we highlight two stocks in Indian IT Services space - Persistent Systems (PSYS) and Happiest Minds (HM) - that are well positioned to deliver industry-leading growth in FY24E and beyond with expectations of mid-high teens organic revenue growth.

CTSH reported revenue growth of 1.5% YoY CC, above the top end of management guidance (-1% to 0% YoY CC) in Q1CY23. This includes 100bps inorganic contribution. Company reported strong bookings growth of 28% YoY in Q1CY23 with the TTM orderbook at US$ 25.6bn and book-to- bill at 1.3x.