India IT Services: Implications of Cognizant’s Sep-10 results: Morgan Stanley

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India IT Services
Implications of Cognizant’s
Sep-10 results for Indian IT
Quick Comment: Cognizant (CTSH) reported strong
10% qoq revenue growth, slightly below the growth rates
reported by Infosys and TCS for the Sep-10 quarter.
Despite the strong 2Q and increase in FY revenue
growth guidance to ~39% yoy, we believe CTSH’s
results are unlikely to drive growth expectations or stock
prices higher for Indian IT vendors in the near-term.
What's new: CTSH indicated 4Q revenue guidance of
US$1.27bn (+4.4% qoq) and US$4.55bn (at least
+38.8% yoy) for F2010. Management maintained its
margin target of 19-20% excluding stock-based
expenses. Guidance for non-GAAP EPS is US$2.5 for
the full year. Cognizant continues to narrow its revenue
gap with Wipro and is only 4% behind Wipro based on its
guidance for the current quarter. More importantly, we
note that the revenue growth differential between CTSH
and Wipro has been up to 12% over the last four
quarters.



Implications for the group: Cognizant management
does not expect a budget flush in 4QF2010. This is in
line with commentary from management of large Indian
IT companies. Rupee appreciation and fewer working
days are likely to lead qoq growth rates to decelerate in
the Dec-10 quarter, as is evident in the 4.5%-5.5% qoq
guidance given by large vendors. We believe the cycle
related to pent-up demand and M&A-related projects
appears to have played out; henceforth revenue growth
would be driven by clients’ more routine development
initiatives. Consequently, despite flat to higher budgets,
IT vendors are likely to find it tougher to accelerate their
revenue growth rates further in FY12e.
Pricing trends: We believe the pricing commentary
from large vendors has been less vocal in the quarter.
Companies still maintain hope of a price increase but
TCS delayed its expectations of a pricing increase to
1QFY12. CTSH maintained on the call that discussions
are progressing, and though the increases may not be
material in nature, they could still be up yoy.