Takeaways from Accenture Q2 FY21 Results: Jefferies top pick is Infosys from IT sector

Accenture's Q2 FY21 revenues grew 5% YoY, ahead of its guidance. Demand environment remains strong with the company's new bookings growing 13% YoY to US $16 bn - their highest ever. Management expects demand to remain strong led by accelerated digital transformation and as a result has raised its revenue growth guidance by 250 bps to 6.5-8.5%. Jefferies see this as positive for Indian IT services and maintain constructive stance with Infosys as their top pick.

Revenue ahead of guidance:

Accenture's 5% YoY revenue growth was ahead of its guided range of 1-4% while Health & Public Services (HPS) and Financial Services were the best performing verticals, Products returned to growth after three quarters of decline. Revenues in Resources vertical continued to decline and fell 7% YoY. The revenue decline in highly impacted verticals (20% of revenue) moderated to mid single digits from a double-digit decline in the previous quarter.

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Broad-based revenue growth:

Revenue growth was broad-based with growth across all geographies. North America saw a strong 7% YoY cc growth driven by Public Services, Financial Services and Communication verticals. Growth markets grew 6% YoY driven by HPS, Financial Services and Hi-Tech verticals, with strong growth in Japan. Europe marked a return to growth, with revenues up 3% YoY, with growth in HPS, Life Sciences and Financial services. Italy, UK and Switzerland were the key growth markets in Europe. Revenue growth was dragged by the Resources vertical across markets. While Energy and Chemicals continue to be under pressure, there is some improvement in utilities.

Strong demand; improved profitability:

Accenture highlighted that demand was stronger than its expectations driving a 13% YoY growth in new bookings to US $ 16bn - their highest ever. Cloud and Security witnessed strong double-digit growth. Outsourcing growth picked up to 11% YoY and the company expects double digit growth in outsourcing in the second half of FY21. The company also saw improvement in contract profitability, which along with revenue growth, led to a 10-20 bps upgrade in FY21 margin guidance to 15-15.1%.

Strong demand outlook; Growth guidance raised:

Management highlighted the enterprises continue to go through compressed transformation which requires rapidly changing multiple parts of their business simultaneously. Management believes that while growing cloud adoption is a large opportunity by itself, it will enable organizations to truly leverage the benefits of cloud and drive enterprise spending. For FY21, Accenture has raised its revenue growth guidance from 4-6% earlier to 6.5-8.5% (incl. 2.5% inorganic). Its Q3 FY21 revenue guidance of US $12.55 - 12.95 bn implies a 4-7% QoQ growth.

Takeaways for Indian IT Sector:

Accenture’s Q2 FY21 performance reinforces our confidence in continued spends on cloud, security and digital transformation which are key medium-term growth drivers. Tier-I Indian IT firms are favorably positioned to leverage these growth opportunities. Accenture’s expectation of a strong demand environment is fairly aligned with our expectations for Tier-I Indian IT firms. Jefferies continues to like the Indian IT services space with Infosys as their top pick.