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Technology
India
Cognizant – management discussion notes. Reaffirming our positive thesis on the
demand environment for the sector, CTSH management indicated – (1) strong demand
undercurrent for IT offshoring led by broader and deeper penetration of the global
delivery model, (2) Tier-I companies better-positioned than Tier-IIs on growth, and
(3) still tight though manageable supply-side situation. Our positive stance on the sector
and Tier-I bias stays. Infosys and TCS remain top picks.
Key highlights from our discussion with CTSH management
Demand momentum remains strong and continues to become increasingly broad-based across
verticals and geographies.
The company continues to be a tad conservative in its guidance, especially on discretionary IT
spend assumptions. We note that CTSH has guided for a 26% yoy growth in US$ revenues for
CY2011E. The company has outperformed its guidance meaningfully in the past years and
attributed the same to surprises from (1) stronger-than-expected offshoring adoption, and
(2) discretionary spend levels – these are difficult to forecast at the beginning of the year and
hence the company tends to build some conservatism on this aspect. The company also
indicated that a bulk of outperformance versus guidance in the previous years was driven by
surprises from existing accounts rather than new account wins during the year.
CTSH once again indicated healthy pricing environment and expects pricing improvements in
CY2011E. The company believes that pricing improvement is a wider industry-wide
phenomenon – we note that this is contrary to some of its peers’ recent commentary on the
pricing environment. CTSH sees 2-3% like-on-like price increases (not adjusted for mix-change
led realization variance) as a reasonable assumption for CY2011E.
Supply-side situation remains challenging and could remain so till the current batch of freshers
enter the system. Wage inflation could remain high in FY2012E albeit the level of hikes could
be moderately lower than last year.
From a longer-term perspective, CTSH believes that there is ample headroom for growth for the
IT offshoring industry and sees execution and managing the delivery engine as the key
challenge to realizing this growth potential. The company does not believe that the delivery
issue is about the quantity and quality of talent pool; it is about the ability of companies to
manage logistics, training, assimilation of new hires, etc. as increasing employee base continues
to exert pressure on the current system.
Sector view – remain positive on demand, wary of margin/attrition pressure; Tier-I companies
better-positioned
We remain positive on strength and sustainability of demand upturn for the Indian IT services
industry. Clients’ IT budget finalizations are on time this year, budgets are up 2-3% on an average,
spend-to-budget ratio will likely rise, discretionary spends will pick up, and market share gains for
offshore players will likely continue. In addition, strong deal renewal pipeline throws in additional
opportunities for Indian players to enter marquee accounts. Increased regulatory compliance
spending is likely to fill the slack on account of reduction in M&A-related spend in the BFSI vertical.
Reiterate our Tier-I bias given better growth outlook and margin profile versus the mid-sized pack.
Infosys and TCS are out top picks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Technology
India
Cognizant – management discussion notes. Reaffirming our positive thesis on the
demand environment for the sector, CTSH management indicated – (1) strong demand
undercurrent for IT offshoring led by broader and deeper penetration of the global
delivery model, (2) Tier-I companies better-positioned than Tier-IIs on growth, and
(3) still tight though manageable supply-side situation. Our positive stance on the sector
and Tier-I bias stays. Infosys and TCS remain top picks.
Key highlights from our discussion with CTSH management
Demand momentum remains strong and continues to become increasingly broad-based across
verticals and geographies.
The company continues to be a tad conservative in its guidance, especially on discretionary IT
spend assumptions. We note that CTSH has guided for a 26% yoy growth in US$ revenues for
CY2011E. The company has outperformed its guidance meaningfully in the past years and
attributed the same to surprises from (1) stronger-than-expected offshoring adoption, and
(2) discretionary spend levels – these are difficult to forecast at the beginning of the year and
hence the company tends to build some conservatism on this aspect. The company also
indicated that a bulk of outperformance versus guidance in the previous years was driven by
surprises from existing accounts rather than new account wins during the year.
CTSH once again indicated healthy pricing environment and expects pricing improvements in
CY2011E. The company believes that pricing improvement is a wider industry-wide
phenomenon – we note that this is contrary to some of its peers’ recent commentary on the
pricing environment. CTSH sees 2-3% like-on-like price increases (not adjusted for mix-change
led realization variance) as a reasonable assumption for CY2011E.
Supply-side situation remains challenging and could remain so till the current batch of freshers
enter the system. Wage inflation could remain high in FY2012E albeit the level of hikes could
be moderately lower than last year.
From a longer-term perspective, CTSH believes that there is ample headroom for growth for the
IT offshoring industry and sees execution and managing the delivery engine as the key
challenge to realizing this growth potential. The company does not believe that the delivery
issue is about the quantity and quality of talent pool; it is about the ability of companies to
manage logistics, training, assimilation of new hires, etc. as increasing employee base continues
to exert pressure on the current system.
Sector view – remain positive on demand, wary of margin/attrition pressure; Tier-I companies
better-positioned
We remain positive on strength and sustainability of demand upturn for the Indian IT services
industry. Clients’ IT budget finalizations are on time this year, budgets are up 2-3% on an average,
spend-to-budget ratio will likely rise, discretionary spends will pick up, and market share gains for
offshore players will likely continue. In addition, strong deal renewal pipeline throws in additional
opportunities for Indian players to enter marquee accounts. Increased regulatory compliance
spending is likely to fill the slack on account of reduction in M&A-related spend in the BFSI vertical.
Reiterate our Tier-I bias given better growth outlook and margin profile versus the mid-sized pack.
Infosys and TCS are out top picks.
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