Cognizant Technology 3Q: CY10 on track for 40% growth:: Macquarie

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Cognizant Technology
3Q: CY10 on track for 40% growth
Event
 Cognizant reported good 3Q CY10 results that were above consensus
expectations on all financial parameters. The company has raised its CY10
revenue growth guidance to 39% from 36%. Good 3Q10 results and upgrade
in guidance comes on back of strong quarterly results from Indian IT vendors.



Impact
 3Q CY10 results reinforce our investment thesis. Our positive investment
bias towards the sector is predicated on strong demand outlook for Indian IT
vendors. We witnessed double digit QoQ volume growth from a couple of
vendors in this quarter – underlining our view.
 Client conversations suggest demand strength to continue in CY11.
Cognizant management disclosed on the earnings call that initial discussion
with CIO's suggest that IT budgets should be having a positive bias going
forward. The company expects growth in traditional outsourcing services to be
supplemented by work in new areas of cloud computing, Infrastructure
management and analytics.
 3Q10 financial details. Cognizant reported 3Q revenues of US$1,216m (up
10% QoQ and 43% YoY), EBIT of US$228m (up 13% QoQ and 36% YoY)
and net profit of US$203m (up 14% QoQ and 22% YoY). EBIT margins for the
quarter were 18.8% (up 20 bp QoQ). Operating margin (ex-ESOs) were
19.9%, flat vs. last quarter.
 3Q10 operational details: Attrition for the quarter came in at 18.2% on a
LTM basis. Management commented that we should see attrition trending
downwards going forward. Pricing was up 1% for onsite and flat for offshore
on a sequential basis (vs 3% onsite and flat offshore for Infosys). Cognizant
ended the quarter with 95,600 employees.
 Guidance upgrade points towards acceleration in business momentum.
Cognizant now expects to deliver CY10 revenues of US$4.55bn up from
US$4.46bn guided last quarter. Of the US$90m increment in annual guidance
only US$42m has come from the beat in 3Q CY10 revenues.
Outlook
 Remain positive on Indian IT sector, favour TCS and HCLT. Good 3Q10
results and the upgrade in guidance from CTSH strengthen our upbeat
investment view of the Indian IT sector. Our preferred large-cap pick in the
sector is TCS. Among Tier 2 players, we prefer HCLT for its strength in
infrastructure management and enterprise application services offerings.