IT Services: Cognizant results inline with peers:: Religare

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IT Services
Cognizant results inline with peers; Maintain neutral view
on Indian IT services


Good 3QCY10 ahead of guidance: Cognizant (CTSH) reported Q3CY10 results
with revenues growing 10% QoQ to US$1.22bn, above their guidance of
US$1.18bn. Margins were flat QoQ at 20% and net profit grew 17.3% QoQ, to
US$216mn. Pricing was flat offshore but up 1% QoQ onsite. Growth was broad
based across the verticals and with strong growth in new application development
(up 14% QoQ) indicating improved discretionary spending. From an Indian IT
perspective, the growth was broadly inline with the other Indian IT peers.




Guidance of 4.4% QoQ growth in 4QCY10: CTSH has guided for 4.4% QoQ
revenue growth (inline with Infosys guidance) in Q4FY10 (Rev - US$1.27bn) and
raised its 2010 guidance to atleast c39% YoY growth from the earlier guidance of
atleast 36% growth. The current quarter guidance assumes that M&A related pent
up spends in the BFSI are tapering off and no budget flush in the final quarter.
Management commentary on the CY11 IT budgets was positive and expects 1)
there will be an upward bias in the IT budgets and there is an increasing trend
towards outsourcing and 2) there could be some improvements in the pricing
discussions.
Metrics: Application development revenues grew by 14% sequentially to account
for 50% of the revenues. Strong growth in ADM shows that discretionary demand
was particularly strong in the quarter. Geographically the company saw 9% QoQ
growth in North America and 15% QoQ growth in Europe (12% on a constant
currency basis). BFSI, Healthcare and Manufacturing, Retail and Logistics segments
grew by 10.5%, 7.4% and 13.3% QoQ respectively. Employee headcount rose by
7,000 people and attrition on an annualized basis stood at 21.8%. Offshore
utilization including trainees for the quarter rose to 75% from 73% last quarter.
Implications for Indian IT: Overall a good performance from CTSH, coming off a
strong base of 2QCY10, continues to reflect good near term demand momentum.
However CTSH, usually an outperformer, delivered growth inline with larger
industry players this quarter. In our view, with the exception of TCS, no other
player has surprised in a big way on growth expectations. We believe that
outperformance has really been stock specific and valuations in the top-tier
names remain rich with limited room for earnings upgrades. We maintain our
Neutral view on the sector.