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Accenture's growth offers lesson for Indian IT firms

MUMBAI (NewsRise) -- U.S. outsourcing and consulting company Accenture surprised investors with a strong revenue growth in the August quarter, showcasing to Indian companies higher investments in new-age computing technologies could help them tide over challenges.

Accenture Thursday said net income rose more than 43% to $1.13 billion in the fourth quarter ended Aug. 31, from $788.13 million a year earlier, while revenue grew 8%. The increase was fuelled by a jump in revenue from its digital, cloud and security-related services that now account for 40% of the total revenue.

Accenture's performance contrasts with the lackluster outlook portrayed by its smaller Indian rivals such as Tata Consultancy Services and Infosys that are have cautioned about a weaker July-September performance. They cited slowing technology investments in the face of macroeconomic uncertainties triggered by Britain's decision in June to exit the European Union.

But Accenture dismisses any impact of the so-called Brexit on its performance.

"When you look at the backdrop of Brexit, specifically in Europe, we have not seen any material impact to date," David Rowland, chief financial officer of Accenture, told analysts in a conference call. "We didn't see that in the fourth quarter and we don't see anything in the first quarter."

For the Indian IT companies, Brexit has struck a double whammy as the sector has already been contending with changing nature of demand for outsourcing services. The rapid pace of digital technology adoption is cannibalizing industry's current stream of revenues that largely rely on the number of engineers put on each project.

"Accenture's growth in newer services is able to offset much of the commoditization headwinds on its traditional services," brokerage IIFL Institutional Equities said in a note. "Also, Brexit doesn't seem to have impacted business conditions for Accenture adversely."

IIFL warns that Indian IT companies' relatively higher share of traditional services such as writing software and remotely managing technology infrastructure of clients may continue to result in "headwinds in the near term." Top Indian outsourcing companies still earn more than 80% of their revenue from traditional technology services.

Over the last few years, Accenture's growth in digital services has been fuelled by its increasing number of acquisitions, contrary to the strategy of India's top IT companies.

In the fiscal year ended in August, Accenture spent $930 million in acquisitions, 16% more than the previous year, buying up 15 companies. Nearly 70% of its investments in the last two years were in new-age computing technologies. In contrast, India's top IT companies have been thrifty, analysts say.

TCS, India's biggest software exporter, has close to $1 billion in cash on its books, while second-ranked Infosys has $4.92 billion.

"We continue to believe that aggressive investments in automation are critical for Indian IT to offset the current headwinds," IIFL said.

To be sure, some analysts say the prowess of India's IT companies in traditional services will help them tide over the challenges posed by macroeconomic volatilities.

"Whilst Indian IT is relatively disadvantaged in the early stages of digital, eventually its traditional advantages of lower cost structure, knowledge of legacy systems, and relationships with chief information officers will become important," brokerage Ambit Capital said in a note.

"We remain confident that Indian vendors like TCS will be able to roll with the punches of the volatile macro-environment and growth will accelerate in a year or so."

Shares of TCS lost 0.19%, while Infosys gained 0.59% in Mumbai trading on Friday. The benchmark S&P BSE Sensex gained 0.14%.

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