Teji Mandi Explains: Take away for India's IT industry
Teji Mandi Explains: Take away for India's IT industry

Strong signs have emerged for Indian IT companies ahead of the beginning of the next earning season in the form of results from Accenture.

Accenture has reported strong Q3 earnings, with revenue growing 13% YoY at USD13.3bn. Deal wins trend also remains strong, up 40% YoY at USD 15.4 bn.

Importantly, it has increased its growth guidance by 300bps. It is primarily led by higher organic demand and client spend. Revenue growth guidance for next quarter is also in the range of 17-21%.

Accenture has also set an aggressive target for acquisition and it has upped allocation for acquisitions to US$4 bn in FY2021. New acquisitions will result in higher inorganic contribution of ~4% in FY2022E to revenues as compared to ~2-2.5% in the past.

How does it matter?

Indian IT services industry tends to mirror Accenture's performance. Hence, Accenture's quarterly result should be seen as a positive read-across for Indian IT companies.

The results indicate a healthy demand environment for the Indian IT Services industry. It has seen significant traction recently, aided by the growing need for digitisation from companies across the globe. Accenture's earnings reiterated that Digital transformation remains a structural trend. And it can positively reflect in the near term performance of its Indian IT peers.

Growing talent war

Accenture's results have also highlighted the growing talent war in the IT industry, putting pressure on employee cost. While the attrition increased to 17%, the company also aggressively added manpower for timely execution of orders.

IT companies are seeing a consistent rise in wages as they are fighting to acquire and retain employees. It has increased employee costs for all the major IT companies in the previous year. Employee benefits expenses for TCS went up to Rs 91,814 crore in FY21 as against Rs 85,952 crore in FY20. For Infosys, it increased to Rs 55,541 crore vs Rs 50,887 crore in the previous year. Wipro reported its employee cost rising from Rs 33,237 crore in FY21, from Rs 31,657 crore.

Shortage of talents remains a concern and a potential margin drag for Indian IT Services companies. It could potentially drag down the margins. However, a high number of large deal wins could provide some comfort on profitability despite the margin pressure in the near term.

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