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Tech stocks tumble after Accenture guidance signals weak demand ahead

Tech stocks tumble after Accenture guidance signals weak demand ahead
  • All the five top losers in the Nifty50 pack were tech majors — with HCL seeing the steepest fall of around 4%.
  • Accenture lowered its revenue guidance, a surprise move that affected the IT pack on Friday.
  • Brokerages say that a persistent weak demand outlook can play spoilsport for possible revenue growth in FY25 as well.
India’s tech stocks pack slipped down a slippery slope on Friday after tech major Accenture signalled a weak demand environment. All the five top losers in the Nifty50 pack were tech majors — with LTI Mindtree and HCL Tech falling by around 3%. Wipro, LTI Mindtree, Infosys and TCS also slipped anywhere between 2-3%.

This is in spite of the fact that the broader markets and indices closed in the green. “While most sectors experienced gains, the IT remained in the red due to subdued guidance from Accenture, a major global IT player,” said Vinod Nair, Head of Research, Geojit Financial Services.

Accenture, which is listed in the US, declared soft earnings, which was expected. The surprise, however, was that it lowered its FY24 revenue guidance to 1-3% from the earlier projections of 2-5%. Moreover, it’s now expecting a higher contribution of acquisitions to its revenue at 3%, from 2% earlier. This implies that its organic forecast of revenue growth is low, indicating a weak demand for IT services in the market.

“Accenture barely cuts guidance. Barring the Covid period, the last time ACN reduced the lower end of its guidance was in 3QFY13. That suggests the uncertainty in the spending environment remains at a decadal high,” said a report by J M Financial.
Stock

Friday open

30-day change

TCS

-1.6%

-1.4%

Infosys

-2.7%

-7.7%

Wipro

-2.4%

-5.9%

HCL Tech

-2.5%

-4%

Tech Mahindra

-1.5%

-2.8%

LTI Mindtree

-2.9%

-6.2%

LTTS

-2.7%

0.8%

Mphasis

-2%

-11.8%

Coforge

-2.7%

-14%

Persistent Systems

-2.5%

-5.7%

Source: NSE

Calibrating FY25 expectations, say brokerages

The IT sector had been under immense pressure in FY24, as the US and other global clients cut down on discretionary spending. Moreover, delays and furloughs in the system have been leading to revenue leakage — leading to marginal growth in revenue vs slight falls seen over the last three quarters.

The street, however, was expecting a better show in FY25 as compared to FY24 which is expected to be weaker than the year before. The confidence came from early this year even since the stocks have been pricing in a possible interest rate cut by the US Fed.

While the latter indicated a soft monetary policy outlook recently, Accenture earnings point to extended trouble in the sector.

“A likely weak FY24 exit, as suggested by our recent checks, will further pull down FY25 estimates, in our view. We, therefore, see further calibration in the Street’s (and to an extent ours) growth expectations now. That should result in valuation contraction as well. We continue to remain cautious on the sector,” says J M Financial.

Nuvama however believes that the expectations have already been low, and sees a medium-term potential of the sector.

“We believe FY25 Street estimates, for Indian IT companies, have been adequately rationalised, and have little downgrade risk, from current levels. We maintain our positive stance on the sector and expect a sustainable strong demand environment to drive strong earnings growth over the next three years,” says Nuvama.

The Nifty IT index was trading 1.87% per cent lower on Friday morning at 35,361.3. Over the last three months, the index has witnessed a drop of 0.89% given the continued pressure on most Indian IT stocks.

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