Accenture, Cognizant could see revenue growth but a strong US dollar could spoil the party

• Global IT majors will have to bear the brunt of a strong US dollar, despite expectations of revenue growth.
• Back home, Indian IT giants are bearing the brunt of concerns of a potential recession in the US and Europe.
• Several economists have predicted that the US, the world’s largest economy, could slip into recession in the near term.

While Indian IT companies are worried about a potential slowdown due to recession, their global counterparts have already started factoring in the impact on their profitability and revenues because of it.

The fact that two overseas IT giants – Accenture and Cognizant – have lowered their growth numbers says a lot about the bleak outlook for the sector because of rising inflation and currency headwinds.

Accenture cut earnings per share for 2022 to $10.61-10.70, compared with its previous estimate of $10.61-10.81. The Russia-Ukraine war also had an impact on its earnings as it decided to close down its Russian business.

The company said it expects a negative foreign exchange impact of 4.5% in fiscal 2022, worse than its previous forecast of a 3% forex hit, as per a Reuters report.

Note that Accenture makes more than half of its revenue from outside the US. A strong US dollar means weakness in other currencies – this has an adverse impact on companies with exposure to currencies other than the dollar.

Confirming the bleak environment to make money, even Cognizant lowered its revenue guidance to 9-11% in constant currency terms as compared to 8.5-11.5% earlier.

“Results were strong though the focus of the Street has shifted to impact on business in a recessionary environment,” said a report by Kotak Institutional Equities.

A recession in the US and Europe will impact Indian IT companies directly
Stocks of Indian IT companies have seen a major correction this year, as a surging inflation and the rising interest rates reduce the spending power of their clients in the US and Europe.

Post the breakout of the Covid pandemic, Indian IT giants TCS, Infosys and Wipro reported record earnings as their clients rushed to digitize their operations to meet their growing IT needs.

Now, it looks like the era of record growth is over, leading to sharp corrections in stock prices.

"The stock price correction (in Indian IT firms) has largely been due to de-rating of valuation multiples, as earnings estimates have largely remained intact or seen minor downgrades. The reasons for this sharp derating, as we mentioned above, are largely related to the global macro environment,” said a report by Phillip Capital.

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