Accenture Q1 Result Read-Through: Stellar Revenue Performance; Raises FY22 Revenue Growth Guidance

* Strong traction continues in consulting and outsourcing businesses: Accenture's (ACN) revenues rose 27% YoY to USD14.97bn (27% in local currency), well ahead of the upper end of its guided range of USD13.9bn-USD14.35bn. ACN saw strong, broad-based demand across industries, services and geographic markets, resulting in robust overall operating performance and strong order booking with a stable win rate. The company posted healthy double-digit growth in local currency in Cloud, Industry X and Security strategic priorities, while Interactive saw strong double-digit growth. All three service lines - Strategy & Consulting, Technology and Operations - reported robust double-digit growth during the quarter. Consulting revenue grew 33% YoY to USD8.39bn in Q1, continuing the strong momentum seen in Q4FY21. Revenue growth in the outsourcing business was healthy at 21% YoY to USD6.57bn. New bookings were at a record high of USD16.8bn (30% YoY, book-to-bill 1.1x) in Q1 and were broad based across verticals and service lines. Consulting bookings stood at USD9.4bn (41.4% YoY, book-to-bill 1.1x) and outsourcing bookings came in at USD7.4bn (17.6% YoY, book-to-bill 1.1x). The operating margin expanded by 20bps YoY to 16.3%. Utilization was stable at 92%. Quarterly annualized voluntary attrition moderated to 17% from 19% in Q4FY21. The company added 50,057 net employees (~8% addition QoQ) during the quarter.

* Broad-based growth across verticals: Growth in Q1 was driven by Products (34% in local currency), Communication, Media & Technology (32% in local currency), Financial Services (24% in local currency), Health & Public Services (23% in local currency), and Resources (17% in local currency). The company is seeing secular demand across its verticals and expects to sustain broad-based growth momentum in the coming quarters.

* FY22 revenue growth guidance revised upwards to 19-22%: ACN revised its FY22 revenue growth guidance upward to 19-22% in local currency from 12-15% guided earlier (organic 14-17% vs. earlier 7-10%) on the back of superior revenue performance in Q1 and robust demand trends. The guidance assumes a negative 3% foreign exchange impact on USD revenues (earlier expected 0.5%). The operating margin is expected to expand by 10-30bps to 15.2 to 15.4%. ACN expects Q2FY22 revenues to be in the range of USD14.3-14.75bn, up 22-26% YoY in local currency. The company expects OCF and FCF to be in the range of USD8.4-8.9bn and USD7.7-8.2bn, respectively.

* Earnings call takeaways: 1) Q1 revenues came in USD600mn higher than the upper end of ACN's guided range, aided by broad based over-delivery across geographies, verticals and services. Management indicated that the increasing need for speed, compressed transformation initiatives and acceleration in cloud journey is driving better than expected demand. 2) ACN is seeing an extraordinary demand environment as companies continue to invest in their multi-year digital transformation journey. 3) In FY22, it expects strong double-digit growth in consulting (better than earlier expectations as per management) and double-digit growth in outsourcing (vs. earlier expectations of high-single digits to low-double digits); 4) The company added 15 diamond clients in Q1 (compared to 13 in FY21), taking the total to 244. 5) ACN plans to invest ~USD4bn on M&A in FY22 (invested USD1.7bn on acquisitions in Q1) and the guidance continues to assume ~5% revenue contribution from M&A. 6) ACN signed deals worth over USD100mn with 20 clients in Q1FY22 (18 in Q4FY21). 7) ACN promoted over 90,000 employees in Q1FY22 with 1,030 new managing directors and 143 new senior managing directors. 8) ACN is seeing pricing improvements in many parts of its business. 9) Management indicated that only ~30% of payload has moved to cloud so far, which offers significant growth opportunities.

* Read-through for Indian IT peers: ACN's revenue beat in Q1FY22 (USD600mn beat) and a strong upward revision in revenue growth guidance for FY22 (~USD3.5bn increase) indicate a robust demand environment. Broad-based healthy demand, strong outsourcing order booking (17.6% YoY in Q1 on the back of 21% in FY21) and upgrade in FY22 growth expectations in the outsourcing business (double-digit growth vs earlier high-single digits to low-double digits) augur well for Indian IT peers. Though attrition remains an issue across the industry, clients have become more amenable to price increases. ACN has also indicated that it is seeing an improvement in pricing in many parts of its business, which should support margins. The Nifty IT index rose 1%/27%/58% in the last 3M/6M/12M vs. -2.2%/9%/26% of the Nifty. We believe that a strong demand environment, sustained acceleration in revenue growth and robust order booking will support higher valuations. We prefer INFO, TECHM, HCLT and TCS in large caps, and PSYS, FSOL, MPHL, BSOFT and eClerx in mid-caps.