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Accenture outlook spurs hopes of better earnings for Indian software exporters

Financial services, however, remains a cause for worry

Accenture's strong outlook boosts the confidence of India's software exporters, who are barely recovering from a prolonged period of slow growth, amid a transition to new internet technologies such as cloud and artificial intelligence.   © Reuters

MUMBAI (NewsRise) -- Outsourcing major Accenture raised its annual revenue growth forecast on the back of strong demand for digital and cloud technology, raising hopes for India's software exporters whose growth outlook has been clouded by fears of a global economic downturn.

However, the weak performance of Accenture's financial services business remains a cause of worry for Indian software exporters, who earn a bulk of their revenue from the sector.

On Thursday, the New York-listed company said it expects revenue to grow 6.5% to 8.5% in local currency terms in the fiscal year 2019, compared with 6% to 8% it had forecast previously.

Accenture's strong outlook boosts the confidence of India's software exporters, who are barely recovering from a prolonged period of slow growth, amid a transition to new internet technologies such as cloud and artificial intelligence. The industry's growth started accelerating last year as companies cashed in on the boom in digital technology spending.

Top Indian outsourcing company Tata Consultancy Services had in January predicted a double-digit revenue growth for this fiscal year that ends this month. Smaller rival Infosys also raised its annual revenue growth forecast for this fiscal year, citing the expanding digital orders.

The read-through from Accenture's financials is that the "demand environment is reasonable even as there are rough edges visible in weak financial services growth," Kotak Institutional Equities said in a report on Friday.

Accenture's revenue from the financial services business fell 2% in the second quarter. While the insurance business grew in double-digits, it reported moderate decline in revenues in banking and capital markets mainly due to a decline in Europe and muted performance in North America.

However, the company was optimistic of "an uptick" in the second half of the year.

The pick-up in growth for India's IT companies in the last few quarters was partly driven by a recovery in the financial services sector. On Wednesday, Ambit Capital warned that "a certain degree of caution is being noticed in U.S. banking and financial services business in reaction to negative news about the state of the economy." This is likely to translate into "plateauing growth" for the sector, it added.

The fears emerge as the U.S. Fed brought its drive to increase interest rates to an abrupt end this year amid signs of a global economic slowdown and political uncertainties such as Brexit and a trade war with China.

"We believe that information technology spending will be muted in the capital markets segments, especially in Europe," Kotak Institutional Equities said. The brokerage expects steady spending in the traditional banking segment in North America, though it warns of spending caution from a couple of large clients. "Spending outlook at a broader level will be slower than 2018."

Businesses have been wary of the implications of Brexit and the lack of clarity surrounding Britain's plan to exit the European Union. Accenture's interim chief executive David Rowland dismissed the impact of a prospective economic slowdown on the company, saying a "volatile dynamic environment is the new norm."

A strong exit to the fiscal year 2019, a bulging order book, and positive commentary on demand should translate into a far better fiscal year 2020 for Indian software exporters, Kotak said. "However, the downside of a slowing market cannot be ignored either."

Shares of Tata Consultancy remained unchanged, while that of Infosys gained 0.5% and Wipro ended 0.1% higher in Mumbai trading on Friday. The benchmark S&P BSE Sensex closed up 0.3%.

--Dhanya Ann Thoppil

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