Motilal Oswal Financial Services

Sector Update Update | Technology

Sector | 26 September 2024

Technology

A revival on the horizon

Guidance and demand commentary indicate a slight (but certain) uptick in

demand

Revenue growth accelerated to

5% YoY CC in 4Q

Accenture (ACN) reported 4QFY24 revenues of USD16.4b, up 5% YoY CC (2%

organic) and down 0.5% QoQ CC, near the upper end of the guided range. ACN has

guided for 3-6% CC revenue growth for the next fiscal (0-3% organic). The upper end

of the guidance assumes a recovery in discretionary spends, according to the

company. We believe the guidance, deal bookings, and the overall commentary

have turned the corner, which bodes well for the sector. This corroborates our views

in our recent thematic (Technology:

Bounce-back! Charting the path to revival for IT

services),

in which we argue that client spend behavior is changing for the better,

and we could see a return of modernization and discretionary spends going forward,

albeit in some pockets. Our recent upgrades (LTIM, PSYS, and COFORGE) reflect our

expectations of growth in pockets such as US banking, Healthcare and

Manufacturing as well as a gradual recovery in data, ERP and mainframe

modernization projects.

While the slope of recovery, and how broad-based the recovery would be is still up

for debate, the

ACN guidance and the ensuing outlook reduce the downside risk to

our growth estimates.

We are not too concerned about variance in revenue growth

for Indian IT services companies in the upcoming quarter, and believe it should not

lead to a meaningful change in estimates, sentiments, or valuations (short-term

gyrations aside).

The most important catalyst for the sector would emerge after

3QFY25,

when client budgets for CY25 would be finalized and the magnitude of

change in client behavior would become clearer.

New bookings stood at

USD20.2b in 4Q

Positive read-through for Indian IT, healthy bookings growth



Revenue performance:

Revenue stood at USD16.4b (up 5% YoY in CC, 2%

organic) in 4QFY24, near the upper end of the guidance range of 2% to 6%.

Managed services revenue grew 7% YoY CC, while consulting services grew 3%

YoY CC.

Booking recovered in 4Q:

ACN reported outsourcing bookings of USD11.6b, up

41.5% YoY, while consulting bookings grew 1.2% YoY (down 7% QoQ) to

USD8.6b. The book-to-bill ratio came in at 1.2x in 4QFY24, consistent with the

average of 1.2x over the past four quarters.

Revenue guidance:

ACN expects 1QFY25 revenue growth in the range of 2% to

6% YoY CC, while FY25 revenue growth guidance is given at 3% to 6% in CC (3%

inorganic contribution in FY24).

Vertical-wise performance:

Healthcare and Public services led the growth with

11% CC YoY growth in 4QFY24, while Communications/Products/Resources

verticals grew 5%/6%/3% YoY CC. However, BFSI declined 2% in YoY CC.

Stable operating margin performance:

Adjusted EBIT margin increased by 10bp

YoY to 15% in 4Q. For FY25, margin is expected to be in the range of 15.6% to

15.8%, an expansion of 80bp to 100bp from FY24.

Attrition remained flat:

ACN workforce remained stable in 4Q at ~774k, while

attrition remained flat at 14% and utilization stood at 92%.

Abhishek M Pathak - Research analyst

(Abhishek.Pathak@MotilalOswal.com)

Keval Bhagat - Research analyst

(Keval.Bhagat@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Sector Update | Technology

Health and Public Services led the growth



Consistent demand environment with notable growth in Security:

ACN has

observed no significant shifts in the spending patterns of enterprise clients,

indicating a stable demand environment. The Security segment continues to be

one of the fastest growing parts of business, reaching USD9b in revenue in FY24

with 23% YoY growth. For FY25, revenue growth is expected to be driven by

clients' digital transformation efforts and their need to enhance productivity.

Cloud and GenAI remain key growth drivers:

Cloud migration remains a

significant driver of growth, particularly in high-performance compute

applications like mainframes. GenAI is also expected to continue its rapid

growth, with large-scale implementations beginning to take off.

Outlook for Managed Services and Consultancy:

The management continues to

expect Managed Services and Consulting to see low-to-mid single digit growth in

FY25. Managed Services bookings are driven by large transformation deals.

Key verticals performance drive growth:

Healthcare and Public services led the

growth with 11% CC YoY growth in 4Q (9% in 3Q), while

Communications/Products/Resources verticals grew 5%/6%/3% YoY CC (-

1%/2%/3% YoY CC growth in 3Q). However, BFSI declined 2% in YoY CC vs. 5%

decline in 3Q.

GenAI to act as a catalyst going ahead



ACN is seeing good traction from clients on GenAI. For FY24, ACN saw USD3b in

new GenAI bookings, including USD1bn in 4Q, and clocked nearly USD900m in

revenue. The company witnessed a significant jump in revenue in FY24

compared to the previous year, in which ACN clocked ~USD100m in revenue

from GenAI.

The company believes a key challenge is that implementing GenAI will require

clients to be prepared with data infrastructure

– a fuel for GenAI.

The implications of Gen AI will become more pronounced and clients’

conversations are changing from POCs to a material rollout and integration of AI

into their core operations. Further, the company expects GenAI bookings to

accelerate in FY25.

26 September 2024

Sector Update | Technology

Key highlights from the management commentary



The demand environment remains steady, with no significant shifts in sentiment

from CXOs.

Low- to mid-single digit growth is anticipated in both Managed Services and

Consulting businesses.

GenAI is expected to drive growth over the next decade, similar to digital

transformation in the previous decade. The company is further enhancing its

data infrastructure capabilities to support this trend.

Health & Public Service: The segment maintained its strong performance, with

11% CC YoY growth, driven by increased digitization and transformation projects

in the public sector, especially in EMEA and North America. Acquisitions in

public service are expected to accelerate growth in FY25.

Further, ACN has invested in the expansion of its healthcare portfolio through

strategic acquisitions in the US, UK, and Germany.

Communication & Hi-Tech: The division posted a solid performance with 5% YoY

CC growth, with clients increasingly moving to larger digital transformation

projects that require complex technologies.

Continued savings in IT spending are being redirected toward GenAI

investments.

The promotion cycle has been adjusted to align with budget cycles and client

outlooks.

For FY25, ACN expects revenue growth of 3% to 6% in local currency, with more

than 3% likely to be inorganic.

Quarterly performance

Y/E August

Revenue (USD b)

QoQ (%)

YoY (%)

GPM (%)

SGA (%)

EBIT (USD m)

EBIT Margin (%)

Other income

PBT (USD m)

ETR (%)

Adj. PAT (USD m)

Exceptional items

Reported PAT (USD m)

QoQ (%)

YoY (%)

EPS (USD)

FY23

16.0

-3.4%

4.0%

32.4%

10.8%

1,913

12.0%

1,959

28.1%

1,373

-31.7%

-17.5%

2.18

16.2

1.5%

3.0%

33.6%

10.5%

2,564

15.8%

2,616

23.2%

1,973

43.7%

0.4%

3.14

FY24

15.8

-2.6%

0.0%

30.9%

10.3%

2,046

12.9%

2,095

18.4%

1,674

-15.1%

9.9%

2.66

16.5

4.4%

-1.0%

33.5%

10.6%

2,631

15.9%

2,654

25.4%

1,932

15.4%

-3.9%

3.07

16.4

-0.5%

3.0%

32.6%

10.7%

2,353

14.3%

-21

2,332

26.3%

1,685

-12.8%

22.7%

2.69

FY23

64.1

4.1%

32.3%

10.3%

8,809

13.7%

329

9,138

23.4%

6,871

-0.08%

10.90

FY24

64.9

1.29%

32.7%

10.5%

9,594

14.8%

103

9,697

23.5%

7,264

5.73%

11.57

Source: MOFSL, Company

26 September 2024

Sector Update | Technology

Key highlights from the management interaction

Performance and operations



There is clear demand for the company’s GenAI products/services, with clients

moving from proof-of-concepts to larger implantations.

Bookings in Managed Services are mainly fueled by large transformation deals.

The Security segment continues to be one of the fastest growing parts of the

business, reaching USD9b in revenue this year (23% growth).

Communications, Media & Technology: Significant cloud migration continues,

with mainframe modernization acting as a key growth driver. Further, the

Retirement Services segment is at a nascent stage in the cloud journey.

Health & Public Service: Continued strong performance, with 11% CC YoY

growth, driven by increased digitization and transformation projects in the

public sector, especially in EMEA and North America. Acquisitions in public

service are expected to accelerate growth in FY25.

Further, ACN has invested in the expansion of its healthcare portfolio through

strategic acquisitions in the US, UK, and Germany.

Low- to mid-single-digit growth is anticipated in both Managed Services and

Consulting businesses.

Continued savings in IT spending are redirected toward GenAI investments.

The margin profile for GenAI is comparable to that of traditional business lines

and is often embedded in large deals.

With clients prioritizing large-scale transformations, ACN doubled down on its

strategy to be the reinvention partner of clients. This is reflected in bookings of

USD81b in FY24, up 14% in CC terms, including 33 clients with quarterly

bookings of over USD100mn in 4QFY24, bringing the total of such clients to 125

for FY24.

ACN now has 310 Diamond clients (largest client relationships), an increase of

10 from previous year.

FY25 revenue growth is expected to be driven by clients' digital transformation

efforts and the need for increased productivity.

The overall demand environment remains steady, with no significant shifts in

sentiment from CXOs.

GenAI is emerging as a key catalyst for revenue growth. ACN expects another

healthy increase in bookings and revenue in FY25 owing to strong GenAI

demand.

For 1QFY25, the management has guided for 2% to 6% YoY growth in CC terms

and +1.5% impact from forex.

For FY25, the revenue guidance is 2-6% YoY in CC terms, with +1.5% forex

impact and 3% inorganic contribution.

The company expects to return at least USD8.3b in cash to shareholders through

dividends and share repurchases.

The management has guided adjusted operating margin to be in the range of

15.6% to 15.8%, in FY25, up 80bp to 100bp YoY.

Demand highlights



Outlook



26 September 2024

Sector Update | Technology

Story in charts

Exhibit 1:

Revenue growth accelerated to 5% YoY CC in 4Q

Overall (YoY CC

)

27% 28% 27%

21%

16%

22%

15%

5% 4%

1% 0% 1%

-8%

19%

Exhibit 2:

CMT returned to growth in 4Q

Communication, Media & Tech (YoY CC)

32% 32%

31%

23%

11%

-7%

-1%

-12%-11%

Source: Company, MOFSL

Exhibit 3:

Financial Services growth remained muted

Financial services (YoY CC)

20%

24% 25% 24% 22%

13%

10%

5% 3%

-6% -5%

-2%

Exhibit 4:

Double-digit growth in Health & Public Services

Health & Public services (YoY CC

)

21%

18%

23%

21%

19% 19%

15% 15% 14%

13% 12%

10% 9% 11%

16%

Source: Company, MOFSL

Exhibit 5:

Products show growth of 6% YoY CC

Products (YoY CC)

34% 34%

25%

31%

25%

Exhibit 6:

Resources clocked single-digit YoY growth in CC

Resources (YoY CC)

25% 26%

21%

17%

15%

1% 0% 2%

13%

21%

16%

12%

10%

4% 3% 3%

Source: Company, MOFSL

26 September 2024

Sector Update | Technology

Exhibit 7:

Americas continued to witness recovery

26% 26%

22%

18%

Americas (YoY CC)

23%

18%

11%

2% 1%

-1%

0% 1%

Exhibit 8:

Europe saw flat growth in % YoY CC terms

28%

14%

18%

31% 30%

Europe (YoY CC)

26%

17%

12%

-2% -2%

Source: Company, MOFSL

Exhibit 9:

Growth markets remained stable

Growth markets (YoY CC)

30% 30% 30%

26%

Exhibit 10:

New bookings maintained double-digit growth

40%

23%

New bookings (YoY USD)

23%

10%

13%

-4%

-2%

-9%

14%

22% 21%

21%

15%

19%

14%

8% 7%

6% 5% 6%

7% 30%

Source: Company, MOFSL

Exhibit 11:

New bookings stood at USD20.2b in 4QFY24

New bookings (USD b

)

Exhibit 12:

BTB ratio is still holding above 1x

New book-to-bill ratio

1.4

1.3

1.3 1.2

1.2

1.2 1.1 1.1

1.1

1.0 1.0

1.0

15.4

15.0

16.8

19.6

22.1

17.0 18.4

16.2

17.3 16.7

18.5

21.6 21.0 20.2

Source: Company, MOFSL

26 September 2024

Sector Update | Technology

Exhibit 13:

Operating margin improved by 200bp YoY

Operating margins

16%

15%

16%

14%

16%

15%

16%

12%

14%

12%

16%

13%

16%

14%

Exhibit 14:

Utilization remained flat

93%

92% 92% 92%

91% 91% 91% 91% 91% 91% 91%

Utilizations

92% 92% 92%

Source: Company, MOFSL

Exhibit 15:

Strategy & Consulting and Managed services mix continued to tilt toward managed services

Strategy and Consulting

Managed Services

45%

46%

44%

45%

44%

46%

48%

49%

48%

49%

48%

50%

55%

54%

56%

55%

56%

54%

52%

51%

52%

51%

52%

50%

Source: Company, MOFSL

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

26 September 2024

Sector Update | Technology

NOTES

26 September 2024

Sector Update | Technology

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following 30 days take

appropriate measures to make the recommendation consistent with the investment rating legend.

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26 September 2024

Sector Update | Technology

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They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as

a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already

available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed

therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or

in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction,

where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities

described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to

observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost

revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees

from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOFSL or any

of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person accessing this information due to any errors and delays.

This report is meant for the clients of Motilal Oswal only.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 - 71934200 / 71934263; www.motilaloswal.com.

Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 71881000. Details of Compliance Officer: Neeraj Agarwal,

Email Id: na@motilaloswal.com, Contact No.:022-40548085.

Grievance Redressal Cell:

Contact Person

Contact No.

Email ID

Ms. Hemangi Date

022 40548000 / 022 67490600

query@motilaloswal.com

Ms. Kumud Upadhyay

022 40548082

servicehead@motilaloswal.com

Mr. Ajay Menon

022 40548083

am@motilaloswal.com

Registration details of group entities.: Motilal Oswal Financial Services Ltd. (MOFSL): INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412 . AMFI:

ARN .: 146822. IRDA Corporate Agent – CA0579. Motilal Oswal Financial Services Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Insurance, Bond, NCDs and IPO products.

Customer having any query/feedback/ clarification may write to query@motilaloswal.com. In case of grievances for any of the services rendered by Motilal Oswal Financial Services Limited (MOFSL) write to

grievances@motilaloswal.com, for DP to dpgrievances@motilaloswal.com.

26 September 2024