IT - Cognizant results endorse robust demand for offshore services; Edelweiss

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CTSH: Q4CY10 results snapshot

Cognizant Technologies (CTSH) reported strong revenues for Q4CY10 (up 7.7% Q-o-Q and 45% Y-o-Y), at USD 1,311 mn (versus guidance of at least USD 1,270 mn and Street estimate of USD 1,278 mn). EBITDA margins were flat at 20.8% and net profits stood at USD 206 mn (up 1.2% Q-o-Q and 43% Y-o-Y). For CY10, CTSH grew at 40% Y-o-Y, well ahead of peers, indicating that proximity to clients by continued investment in front-end personnel is helping it achieve above-industry revenue growth. For the quarter, net employee addition stood over 8,300 and offshore/onsite pricing was up 2%/1.5% sequentially. 

Absolute revenue addition higher than that of Infosys in CY10

For CY10, CTSH posted an impressive 40% revenue growth, much higher than the 17-25% growth reported by top-3 (TCS, Infosys and Wipro). Highlight of the year was the absolute revenue addition for CTSH in CY10 (USD 1.28 bn), which was higher than that of bigger peers - Infosys (USD 1.11 bn) and Wipro (USD 716 mn). It stood only lower to TCS’ USD 1.54 bn revenue addition (see Chart 1 on page 2).

CY11 guidance of at least 26% growth over CY10

CTSH has guided for at least 26% growth for CY11. We note that the company, in the past five years (out of six), has outperformed its full year guidance by at least 6% (see Chart 2), with CY10 actual growth being double of guidance issued at the beginning of the year. We believe the current guidance of 26%, also has a strong case of being revised upwards in the forthcoming quarters, particularly as the company has built conservatism in the win rate in the new projects.

Are the growth rates converging with Indian peers?

We note that CTSH’s sequential growth outperformance to Indian peers has subsided in the past two quarters. As CTSH was significant beneficiary of pent-up demand in CY10, with that part of the demand cooling off in CY11 there could be some moderation in CTSH’ growth outperformance (see Chart 3).

Implications for Indian IT 

We continue to believe FY12 is likely to be another 26-30% growth year for
tier -I vendors as was the case in FY11. Recent demand is driven not just by cost-outs, but also by significantly higher IT spending by companies targeted at revenue productivity, and is sustainable. Growth in FY12 is expected to be three pronged:  (a) Greater offshoring by the existing client base; (b) market share increase for Indian IT players in the renewal deal market; and (c) sustained improvement in IT spending i.e., revival and embracing offshore market. We maintain our positive outlook on the sector with TCS and HCL Tech as top picks.