Much has changed for Accenture Plc in the past one year. Three quarters ago, it had said that organic growth would fall till August 2018, year-on-year. It had said overall growth would remain flat at 5-8%, while inorganic growth was likely at 2.5-3%, compared to 2% last year. In other words, organic growth was expected to be sluggish.
However, growth has turned out to be higher, and Accenture has been raising its growth guidance every quarter. In the third quarter ended May 2018, the company’s revenue grew 11% in constant currency terms. Consequently, Accenture raised its annual growth target to 9.5-10%, compared to the earlier 7-9%.
The fact that Accenture’s revenue growth is in the high single digits, excluding acquisitions, is commendable.
Especially so, when we consider the base effect. Accenture reported net revenue of $10.31 billion in the quarter ended May, which was more than double that of Tata Consultancy Services Ltd at $4.97 billion in the March 2018 quarter.
Of course, TCS’s scale of operations is enormous, although growth seems to have stunted. Constant currency growth rates have hovered between 6.2% and 7.2% in the last four quarters. While the company has announced a slew of deal wins, and even business analysts have hailed the company’s inroads in digital services, all of this is yet to reflect in its revenue numbers. It is, however, important to note that Accenture has a relatively different business mix, and the recovery in its growth rates cannot be extrapolated to Indian IT companies.
Despite this, TCS’s market value has caught up with Accenture in the past year. A look at the chart alongside suggests TCS has had a revival in growth, with things still being relatively sluggish at Accenture. Before Accenture gave its initial guidance for the year, and much before the pickup in its growth rates, TCS had traded about 4 times its revenue, or at a 70% premium to Accenture’s valuations. Now, after its huge rally, it trades at 5.2 times its revenue, or at a 104% premium to Accenture. This is based on annualised revenues for the latest reported quarter.
This inordinate divergence just goes to show that Indian IT stocks have charted their own course, without any reference to what was happening in the underlying business. Even if we were to give TCS credit for doing better than other Indian companies, that would only justify part of the rally in its shares. The fact that it has sharply outperformed Accenture, whose recovery has been sharper, lays bare flaws with the valuations of Indian IT stocks. Valuations of most IT stocks are bizarre; especially those which have not even half of the recovery in deal wins and growth in digital services as TCS has.
Of course, as pointed out earlier in this column, this is largely because of TINA, or “there is no alternative”, factor, which is leading to high valuations for companies that are not tainted by accounting or other scandals.