Accenture Q2 Result Read-Through: Solid Revenue Performance; Raises FY22 Guidance Further

* Strong revenue growth momentum continues in consulting and outsourcing businesses: Accenture's (ACN) revenues rose 24.5% YoY to USD15.05bn (28% in local currency or LC) in Q2, well ahead of its guided range of USD14.3bn-USD14.75bn. ACN continues to see strong, broad-based demand across industries, services and geographic markets and continues to gain market share, resulting in a robust overall operating performance and strong order booking. It posted strong double-digit growth in Cloud, Industry X, Security and Interactive. All three service lines, Strategy & Consulting, Technology, and Operations, reported robust double-digit growth. Consulting revenue grew by 29% YoY to USD8.3bn as clients accelerated their digital transformation agenda, including moving to the cloud, embedding security across the enterprise and adopting new technologies. Outsourcing revenue grew at a healthy rate of 19% YoY to USD6.7bn. New bookings were at a record high of USD19.6bn (22% YoY, book-to-bill 1.3x). Consulting bookings stood at USD10.9bn (55.7% YoY, book-to-bill 1.3x) and outsourcing bookings came in at USD8.7bn (8.5% YoY, book-to-bill 1.3x). The operating margin was flat YoY at 13.7%. Quarterly annualized voluntary attrition inched up to 18% from 17% QoQ. The company added 24,179 net employees (3.6% QoQ).

* Broad-based growth across verticals: Growth was driven by Products (34% in LC), CMT (32% in LC), Financial Services (25% in LC), Resources (25% in LC), and Health & Public Services (21% in LC). The company continues to see secular demand across its verticals and expects to sustain broad-based growth momentum in the coming quarters.

*  FY22 revenue growth guidance raised to 24-26%: ACN upgraded its FY22 revenue growth guidance to 24-26% in LC from 19-22% guided earlier on the back of a superior revenue performance in Q2 and secular demand trends. The guidance assumes a negative 3% foreign exchange impact on USD revenues and the impact of discontinued operations in Russia (~2,300 employees), but it does not include assumptions for a significant escalation of the conflict and its economic disruptions. The operating margin is expected to expand by 10bps to 15.2% (earlier expected 10-30bps expansion). ACN expects OCF and FCF to be in the range of USD8.7-9.2bn and USD8-8.5bn, respectively (earlier USD8.4-8.9bn and USD7.7-8.2bn). ACN expects Q3FY22 revenues to be in the range of USD15.7-16.15bn, up 22-26% YoY in LC.

* Earnings call takeaways: Q2 revenues came in USD300mn higher than the upper end of the guided range on the back of secular demand and over-delivery across geographies, verticals and services. Management indicated that the increasing need for speed, compressed transformation initiatives and acceleration in the cloud journey is driving better-than-expected demand. ACN continues to gain market share and is currently growing at 3x market growth. ACN spent ~USD1.8bn on 28 acquisitions in H1 and retained its plan to invest ~USD4bn on M&A in FY22. FY22 revenue guidance continues to assume ~5% contribution from M&A. ACN signed deals worth over USD100mn with 36 clients in Q2. While the business environment remained competitive, pricing improved across businesses in Q2. The company is increasing pricing and changing the mix of people to reduce the impact of compensation increases on margin; however, the impact of pricing improvements is lagging the impact of compensation increases.

* Read-through for Indian IT peers: ACN's another strong revenue beat and upward revision in revenue growth guidance for FY22 (~USD2bn increase) indicate a robust demand environment. Broad-based healthy demand, strong revenue growth (20% YoY in H1) and healthy order booking in outsourcing (12.5% YoY in H1 on the back of 21% in FY21) augur well for Indian IT peers. ACN is facing some margin pressure due to wage inflation and elevated attrition amid tight labor markets; however, a conducive environment for price increases will support the margins. The Nifty IT index was up 2.9%/down 2.7%/up 36.1% in the last 1M/3M/12M vs. 0.1%/1.8%/18.7% growth in the Nifty. We believe that a strong demand environment, sustained acceleration in revenue growth, margin support from weaker rupee and robust order booking will support higher valuations. Our pecking order is INFO, WPRO, TECHM, HCLT and TCS among Tier-1 names, and PSYS, MPHL, ROUTE, BSOFT, ECLX and FSOL in mid-caps.