Accenture Q4FY20 earnings: Five key takeaways for the Indian IT companies

 Most information technology (IT) stocks were trading firm on Friday, a day after Accenture, a global behemoth in the consulting and IT services, announced its fourth-quarter results for the fiscal 2020 (Q4FY20). While the company missed estimates for fourth-quarter sales and projected current-quarter revenue below Wall Street expectations, strong traction in the outsourcing business, strong order bookings, and encouraging management commentary were the key positives from the industry's standpoint.

Accenture reported revenues of $10.8 billion, down 2 per cent year-on-year (YoY) and 1 per cent YoY in constant currency terms after including the 2 per cent impact from the decline in reimbursable travel costs due to Covid-19 crisis.

Here's how leading brokerages have interpreted the numbers and extrapolated them to the Indian IT sector.

Stressed verticals

Analysts at Nomura note that Accenture's weakness is restricted to stressed verticals such as retail, manufacturing, travel, and energy, which contributed nearly 20 per cent of revenues for the company at the end of FY20.

"Momentum is intact in seven verticals that contributed nearly 50 per cent of Accenture’s revenues as of 4QFY20 and the traction is strong in healthcare. India IT has a limited presence in healthcare and stressed verticals such as retail, manufacturing, and travel contributed nearly 30-35 per cent of revenues for Tier-1 India IT as of June 2020 quarter data," the brokerage said.

New bookings

New bookings grew 9 per cent YoY to $14 billion, their second-highest ever, and came as a positive surprise, note analysts at Jefferies. New bookings in consulting and outsourcing increased by 7 per cent and 10 per cent to $6.5 billion and $7.5 billion, respectively. Its book-to-bill ratio of 1.3x was the highest in 25 quarters. Management highlighted that nearly 70 per cent of bookings were in digital, cloud, and security related services. "Accenture’s sharp rebound in new bookings reflects accelerated spends on digital transformation which in turn will be a key medium-term growth driver and Tier-I Indian IT firms are favorably positioned to leverage these growth opportunities," analysts at Jefferies said.

FY21 outlook

The company has guided for revenue growth of 2–5 per cent YoY in constant currency (CC) terms in FY21 (Sep’20–Aug’21) and margin expansion of 10–30 basis points (bps), which is encouraging, say analysts at Motilal Oswal Financial Services (MOFSL). "H2FY21 (Mar–Sep’21) is expected to see high single-digit to low double-digit growth. This is a positive for Indian IT companies and further solidifies our expectation of a better FY22 outlook," the brokerage said in a note dated September 24.

Cloud business key focus area

The US-based firm indicated that Covid-19 has accelerated the adoption of Cloud and expects penetration in public Cloud to increase from 20 per cent currently to 80 per cent over the next five years at enterprises. This is positive for Indian IT companies as the shift to Cloud, according to Nomura, will build a foundation for digital transformation and deflates costs that can be reinvested by enterprises to fund their digital transformation initiatives.

High cash conversion

Accenture reported free cash flow (FCF) / net income (NI) of nearly 150 per cent as the Days Sales Outstanding (DSO) improved by 6 days QoQ to 35 days. Indian IT companies have been following a disciplined collections process too, and have reported similar improvements recently. DSO should continue to be largely stable for them going forward.

Govt finalising IT rules for social media to trace original source of info

The government is finalising new IT rules for social media companies that would mandate traceability of originator of information on such platforms and removal of malicious content within 24 hours of notice, Parliament was informed on Thursday.
The proposed new norms include deployment of technology-based automated tools or appropriate mechanisms for proactively identifying and removing or disabling public access to unlawful information or content, Minister of State for Electronics and IT Sanjay Dhotre said in a written reply to the Rajya Sabha on Thursday.

In December last year, the information technology ministry had sought public feedback on amendments to IT Rules for social media platforms and messaging apps in a bid to curb misuse of such platforms for spreading fake news.
"MeitY received 171 comments and 80 counter comments from individual, civil society, industry associations and organisations. The comments so received have been analysed and the Rules are being finalised," Dhotre said.
He noted that social media platforms are intermediaries as defined in the Information Technology (IT) Act, 2000, and that they have to follow certain due diligence as prescribed in the IT Rules.
Dhotre said the key features of proposed amendments in the due diligence to be followed by intermediaries include periodically informing the users for compliance of rules and regulations as well as users agreement and privacy policy.
The proposal also suggests that social media platforms will have to bring in traceability of the originator of the information, and remove malicious content in 24 hours upon receiving a court order or when notified by appropriate government authorities, he added.
Messaging giant WhatsApp has, in the past, drawn flak from the government on the issue of message traceability. The government has been asking the Facebook-owned company to find ways to identify originators of rogue messages but the US-based firm has resisted the demand citing privacy concerns.
Significant intermediaries with over 50 lakh users will have to set up an office in India and appoint a nodal officer for liaisoning with law enforcement agencies, according to the proposed changes.
Such platforms will also have to deploy technology-based automated tools or appropriate mechanisms for proactively identifying and removing or disabling public access to unlawful information or content, Dhotre said.

Govt moves to rein in social media platforms ahead of Lok Sabha polls

Days after enabling 10 security agencies to intercept, monitor, and decrypt information from computers across the country, the government is moving to rein in social media platforms.
From providing the source of any information deemed a threat to national security, removing objectionable content within 24 hours to having permanent offices in India if the user base is above 5 million, the government is planning amendments to the Information Technology (IT) Act and has sought public feedback by January 15 before taking a final call.

If the plan materialises, it would be mandatory for social media giants such as Facebook, WhatsApp and Twitter to trace the originator of information if needed. The platforms would also need to remove such content within 24 hours of being notified.
On their part, social media firms said they would follow all regulations but privacy of its users would be of utmost concern. “These are preliminary steps. We have to see what rules and regulations are finally formulated,” said a source close to Faceboook.
According to sources in the IT ministry, the government plans to bring in changes in the IT Act before the 2019 polls. “The government wants to plug the root causes of fake news that have led to incidents like rioting and lynching. Before the elections, fake news can create law and order hassles and that is the reason they want social media firms to follow the amended IT Act,” said a senior official in the ministry.

IT ministry officials held a meeting last week with senior executives of Google, Facebook, WhatsApp, Twitter and other companies to discuss the proposed changes.
A few months ago the government had asked chat messaging platforms such as WhatsApp to provide details of the providers of fake news. The company had then said that there were privacy issues and such details can’t be shared. Since then, however, WhatsApp has taken a middle path and paid heed to the government’s other demands, including having a local team, an India head as well as having an office in the country.
According to the draft, which was uploaded on the IT ministry’s website on Monday, automated tools would have to be deployed by social media platforms to identify and disable "unlawful content". Users would be asked to guard against hosting or sharing information that violates any law, deceives or misleads receivers about the origin of messages that are grossly offensive or menacing in nature, or those which threaten national security. These internet companies will also have to preserve relevant records for 180 days for investigation purposes or longer periods, if required.
It has also been proposed that the platforms should inform users at least once a month that if rules are violated, access and user rights would be terminated.
The Congress said if these amendments were cleared, there would be a tremendous expansion in the power of the "big brother" government on ordinary citizens, "reminiscent of eerie dictatorships". When the government allowed the 10 agencies to snoop on computers across India, the Congress accusing the Centre of trying to create a "surveillance state".
Experts also warned that amendments, which would allow traceability of "unlawful content", invade personal privacy and free speech. Cyberlaw expert Pavan Duggal said that some of the changes planned are akin to India's own anti-encryption law. The proposed changes in rules will place social media platforms — even those like WhatsApp which promise users privacy and encryption — firmly under government lens.
Nikhil Pahwa, a digital rights activist, opined that the changes mooted to the IT Act are "harmful" for democracy and free speech. The requirement for platforms to proactively take down content will lead to censorship of speech, Pahwa said. "The amendments are also contrary to the spirit of section 79 of the IT Act, which was created to provide safe harbour to intermediaries, which are enablers of speech and commerce. Also, any government order for traceability must be backed by a judicial order, else it will enable unrestricted surveillance of citizens," he said.

Increased rejection of work visas may raise project costs: Infosys

IT major Infosys has flagged off concerns around an increased rejection of work visa applications and said this could result in delays and increase in project costs for its clients.
The Bengaluru-based company has already been ramping local hiring in key markets like the US to tackle increasing scrutiny around work visas by various governments.

"Recently, there has been an increase in the number of visa application rejections. This has affected and may continue to affect, our ability to obtain timely visas and staff projects. As a result, we may encounter delays or additional costs in managing such projects," Infosys said in a recent regulatory filing.
Infosys also noted that the company may have to apply in advance for visas or could incur additional cost in maintaining such visas that could result in additional expenses.
The company also warned that its international expansion strategy and business could be adversely affected if the change in immigration and work permit laws impairs its ability to staff projects with local workers.
ALSO READ: Faster rate of wage hike may impact profitability, says Infosys
Previously, Infosys had stated that stricter work visa norms across various markets like the US and Australia will not "constrain" its business growth as the IT firm is focussing on hiring locals and training workforce in these geographies.
"....what we are building with this localisation approach is really gearing towards making sure that our business model evolves in the right way, without sacrificing the best elements of the business model for the future. So, I don't think we see that this is going to constrain our business growth," Infosys CEO Salil Parekh had said.
Over the past many months, there has been increased scrutiny over the temporary work visas in various countries like the US and Australia. This has prompted many Indian IT companies to tweak their business models by reducing dependence on visas and hiring more people overseas, instead.
Infosys has announced that it is setting up four technology and innovation hubs and hiring about 10,000 locals in the US over a two-year period. Of this, about 4,000 people have already been hired.

IT employees rue lesser pay hike even as companies show good growth

As the world celebrates International Labour Day, acknowledging worker rights, Indian information technology workers are observing a struggle of a different kind – seeking respectable salary increments.
The IT industry was projected to give a single-digit increment of 9.6 per cent for 2018, according to the Aon salary increase survey. However, employees working with major IT firms in India rue that the average salary hike they have received has been less than five per cent and in even many cases there have been no hikes at all.

At the entry level, salaries have been static for the past 10 years. Experts say the trend will continue, or become worse in 2019.
Many employees of Capgemini, one of the largest IT services and consulting companies, took to Twitter to vent their frustration saying that increment for them has either been nil or even negative.
“I have been with the company for more than two years. Last year also the increment was not so great but this year it was a bolt out of the blue. They have sent me the letter which stated ‘we are pleased to inform you that your salary has been increased to’ with a figure which was actually Re1 lesser than my earlier cost to company,” said a furious Capgemini employee, who did not wish to be named.
The company however told Business Standard that its employee remuneration is defined in an objective process, consistent with industry norms to ensure it is aligned with customer needs, business priorities, and the overall industry evolution. “Annual increments are determined by individual performance and potential, and the strategic business goals of the company,” it said.
Even Tata Consultancy Services, which became the first Indian IT company to cross the $100-billion market cap had announced a salary hikes in the range of 2-6 per cent depending on the geographies. This has not been taken well on Twitter and Facebook with Tweeple advising the company that if it did not give proper hikes and recognitions in long run it’s going to lose innovations. When contacted, TCS declined to comment on the issue.
HR experts say that currently there’s an excess supply of manpower with generic skills which is why the salary hike across the industry continues to remain subdued. “Companies are giving out meagre salary raises to make employees leave. Earlier, they were worried about people quitting but now the attrition rates have come down to manageable levels of 10-12 per cent. They are happy with the below 15 per cent attrition rate because whenever a person leaves them, they are replaced with a lower cost person,” said Kris Lakshmikanth, founder, Head Hunters India.
For Capgemini, the actual salary hike cycle used to be from January, but the company had communicated to its employees that it would be moved to April from this year in order to align with the rest of the industry.
“Sometimes, if the company is going through a rough patch, hikes can be affected but the worst part is that no one is communicating about the zero pay hikes. Employees are more disappointed because they have not been given any explanation from the company regarding this,” said another person working at Capgemini.
Angry techies expressed their displeasure on Twitter with #capgeminibetraysemployees accompanying their tweets. While some asked for the notice period to be reduced to one month so that they could look for new jobs, others joked even Paytm gives more cashback than Capgemini’s dismal increment. This at a time when the company has started the year on a strong note posting a growth of 7.2 per cent in constant exchange rates.
Even though Infosys, India’s second largest IT services company has announced a pay hike with effect from April 1, it is applicable to employees of certain bands, especially junior and middle level, who account for around 85 per cent of its total workforce. For the rest, the compensation revision will be effective from July 1. However, the Bengaluru-based company last month had also announced a $10 million (Rs 652 million) bonus payout for its employees.

Hurdles Indian IT faced in 2017: Jobless growth, protectionism & automation

For decades, India's information technology (IT) services companies grew headcount year on year as they put more people on projects and charged for them from clients.
Reality struck in 2017 when rising automation and rapid decline in orders for traditional services forced them to revisit their people-to-project model. Staring at slow business for traditional services and not enough orders in newer digital services, Indian firms saw jobless growth for the first time in their history.
In the nine months to September, the top six IT services firms – Tata Consultancy Services (TCS), Cognizant Technology Solutions, Infosys, Wipro, HCL Technologies, and Tech Mahindra – combined saw a net addition of 19,175 people, nearly a fourth of what they added in the same period last year.

In addition, job cuts were seen across the industry as IT firms looked to shed flab as they faced pressure on projects after clients cut budgets and demanded more productivity at same costs. In turn, IT firms started embracing automation for lower-end jobs, eliminating the need to deploy people on such projects, and began rethinking their models.
ALSO READ: Year End Specials: How automation, Infosys spat disrupted India's IT sector

Digital services for most Indian companies is around 25 per cent and growing. However, these firms still have over three-fourths of revenue coming from traditional services, which is declining rapidly. For those who work on such projects, despite investments by Indian IT firms to retrain staff, the year ahead will be much more challenging.
The year also saw the unions becoming more aggressive and seeking better work atmosphere for technology workers.
The industry also faced its worst period in a decade due to growing protectionism in the US, its main market, UK, and Singapore, where governments began cracking on visas that Indian workers used to travel to these nations to work on projects. In the US, President Donald Trump, who came to power promising to reduce moving of IT jobs to countries such as India, started new restrictions in issuing visas that discriminated against India-based IT services companies and favoured local American technology firms such as Apple and Facebook.
ALSO READ: Trump's HR 170 Bill, higher visa fees may land Indian IT cos in trouble

To counter this, Indian firms began aggressively hiring fresh graduates from colleges in the US, looking to replicate the assembly line training model that they had built to grow the outsourcing industry. TCS now has over 30,000 local hires in the US, while Wipro says half of its team in the US are local Americans. Infosys plans to hire 10,000 people in the US.
However, the battle is only half won. Firms such as Infosys and TCS are fighting court cases from local US workers who have made allegations of discrimination. A hostile government just adds to the burden.
ALSO READ: TCS faces US trial for 'anti-American bias'

There have been spinoffs with this move too. Global firms who are looking for talent have stepped up the setting up of captive centres or are expanding their teams in India.
Back home, TCS and Infosys underwent top management changes.
While it was a smooth transition at TCS with former CEO N Chandrasekaran being elevated as chairman of Tata Sons and R Gopinathan taking charge as the new head, at Infosys, it was the opposite.
Infosys co-founder Nandan Nilekani was forced to return to the helm to salvage the firm's reputation and bring stability back in the aftermath of the face-off between the former Infosys board and its founder N R Narayana Murthy. R Seshasayee, who was the chairman, quit after a public spat with Murthy after Vishal Sikka resigned from the company. There were allegations of wrongdoing in the severance pay given to former CFO Rajiv Bansal two years ago. Despite independent probes that gave a clean chit to the former board and CEO, Murthy insisted that the report be made public.
After his return, Nilekani gave them a clean chit and declined to make the report public citing confidentiality. He also tasked the team on a global hunt for a new CEO. The team selected Salil Parekh, a former Capgemini executive, as the next boss who will take over on January 2.