Goldman Sachs: India IT: Cognizant Technology Solutions (CTSH, Buy, $69.31)

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Cognizant Technology Solutions (CTSH, Buy, $69.31) 
 Solid demand backdrop for offshore services into 2011 – Management noted that
the demand environment for offshore services remains solid, with clients focusing on
growth initiatives into 2011. Based on early indications, CTSH expects that 2011 IT
budgets should be flat to slightly up over 2010. While the bulk of the company’s
revenue growth was driven by application management work, the demand pattern has
shifted this year with application development projects motivated by both pent up
demand as well as secular drivers such as regulatory compliance and healthcare
reform.

 Expects little budget flush in 4Q10, normal seasonal patterns in 2011 – For the
remainder of 2010, the company does not expect much in the way of budget flush and
noted that seasonal patterns in 2011 will likely be similar to historical periods, with the
calendar 2Q and 3Q being the stronger quarters in terms of sequential revenue growth.
 Wage pressure exists but should ease off in the next 2-3 quarters – Although wage
pressure still exists, especially for experienced hires, CTSH expects the overall impact
to margins should ease off after the next 2-3 quarters because the mix of campus hires
will be higher in 2011. In the near term, management does not see supply as a
bottleneck for growth and noted that the company continues to enjoy first or second
recruiting slots at campus interviews of the tier-1 schools.

 Strong front end capabilities and leadership in focused domains – Management
highlighted that CTSH’s differentiation lies in its front-end capabilities, early vision in
establishing a vertical business model, and leadership position in its focused domains.
The company remains focused on moving up in the value chain by Investing in client
relationships and consulting capabilities – management noted that six of its last eight
acquisitions were consulting companies in various niche areas of its focused domains.
 Emerging markets and new services provide incremental growth opportunities –
In the next 3 to 5 years, while financial services and healthcare/life sciences will remain
the dominant verticals for the company, CTSH expects that the company will become a
lot more global in terms of revenue profile, driven by higher demand growth from
emerging markets. In addition, management noted that newer services such as BPO
and infrastructure services will continue to grow faster than company average, and the
contribution from non-linear revenue relationships will increase significantly over the
next several years.