Accenture Plc reported decent results for the year ended August, although its outlook for the next year is a tad disappointing. The company said it expects revenue to grow between 4% and 7% in constant currency, despite the fact that revenue grew 8% and 7%, respectively, in the preceding two quarters.
Also, according to consensus estimates, the firm is expected to grow 6% in dollar terms in the year till August 2015; adjusted for a forex headwind of 2%, dollar revenue growth is expected to be between 2% and 5%, according to Accenture. US-based analysts at Citigroup Research said in a note to clients, “The Q1-FY15 revenue guide of $7.55-7.80 billion (consensus $7.8 billion) implies a possibly slower start to the year in spite of acquisition impact.” Not surprisingly, the Accenture stock dropped a bit after the results were announced; the shares have declined 3.4% year-to-date.
Indian IT stocks shrugged off this news, and the National Stock Exchange’s CNX IT index rose marginally. The index continues to be perched close to its all-time highs. For some time, Indian IT stocks have charted their own course, on the back of market share gains by companies such as Tata Consultancy Services Ltd.
In mid-July, International Business Machines Corp. (IBM) reported weaker-than-expected results for its services business. Later, Citi’s India-based analysts wrote in a note to clients that most factors that affected IBM’s services business were not applicable to Indian IT firms. “Pricing pressure from competitors—offshore competition and commoditization of lower end services may be putting some pressure (on IBM)—an industrywide phenomenon. For Indian players, pricing is flattish as commoditization at the lower end is largely offset by increase in higher priced service lines such as digital (services).” Another factor that has helped sustain investor sentiment for Indian IT is that the rupee has depreciated by more than 5% in the past four months against the dollar.
It must also be noted that not all aspects of Accenture’s results were disappointing. In the quarter ended August, the company did better than expected, with reported revenue being higher than consensus estimates. Much of the upside came from the outsourcing business, while the amount of new business bookings was lower than estimates, at $8.3 billion.
The company said in a call with analysts that consulting bookings last quarter reflected good demand for systems integration and management consulting.
But as Citi’s India analysts point out, the key takeaway from Accenture’s results for Indian IT is the company’s use of cash. Last year, it gave back 93% of its cash flow from operations to shareholders through dividend and share buybacks. This has helped the company sustain valuation multiples. Indian companies could take a leaf or two out of Accenture’s books. Many of them are holding large amounts of cash, resulting in mediocre return for shareholders. Returning cash or making prudent acquisitions is the need of the hour as growth continues to slow off a high base.