IT sector outlook: Demand environment for Indian information technology (IT) companies is likely to remain soft in the light of Accenture's subdued second quarter results and its downward revision of FY24 organic growth outlook as key indicators, brokerage firm IIFL Securities said in a report.

According to the report, Accenture's quarter revenue remained flat year-on-year in constant currency (CC) terms, falling within the guided range of -2 to 2 per cent year-on-year CC growth. The management highlighted ongoing challenges in discretionary spending and decision-making, particularly evident in smaller projects. Consequently, Accenture's revised its FY24 revenue growth guidance to 1-3 per cent in CC terms year-on-year from the previous range of 2-5 per cent year-on-year, with an expected inorganic contribution of approximately 3 per cent. The report further stressed on a weak near-term demand environment, reflected in the third quarter guidance of -1-3 per cent CC year-on-year.

While new bookings remained strong at $21.6 billion, with notable interest in larger transformation projects focusing on security, Cloud, and Generative AI technologies, revenue conversion was observed to be slower. The report also highlighted a broad-based slowdown across verticals, with Healthcare & Public Services exhibiting the strongest growth at 10 per cent CC year-on-year, while Communications, Media, and Technology experienced a decline of 7 per cent CC year-on-year, IIFL Report highlighted

Moreover, the report pointed out key trends such as the increase in attrition to 13 per cent in second quarter, up from 11 per cent in first quarter, and continued strong demand for Generative AI projects, with new bookings totalling $600 million in second quarter.

In light of these observations, IIFL Securities expressed a cautious outlook on the Indian IT sector, maintaining a negative stance with a sell rating on Tech Mahindra (TECHM) and a reduce rating on Wipro (WPRO), citing weaker growth profiles and poor earnings visibility. The report suggests a better preference for Infosys (INFO) and Persistent Systems (PSYS) on account of better earnings growth visibility relative to their peers.