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Revenue outperformance
moderation and BFSI exposure
could weigh on valuations
3Q FY11F: Expect Cognizant to post revenue growth ahead of peers
We expect Cognizant to report 6.5% q-q revenue growth in 3Q FY11F.
EBIT margins are likely improve slightly by 10bps q-q. Management
commentary on Europe and demand will likely be keenly watched.
Action: Maintain Neutral; wait for better entry points to build in the risks
Cognizant has traded at a premium to its Indian IT peers on: 1) doubledigit
revenue growth outperformance; and 2) margin predictability. We
believe both will continue, but that the growth outperformance gap should
narrow. This, coupled with risks on high BFSI exposure and client
concentration, could weigh on the stock’s valuation, in our view, leading to
a moderation in Cognizant’s premium valuation. We would wait for better
entry points and remain Neutral.
Expect moderation in FY12F growth; FY11F not at risk, in our view
We expect Cognizant to continue to outperform its peer group on revenue
growth despite moderation in our FY12F expectation to 16.5%, while
keeping our FY11F expectation intact at 32.6%. We expect USD revenue
CAGR of 24%, flattish EBIT margins and EPS CAGR of 17% over FY10-
12F.
Catalysts: Economic stability, higher growth
Valuation: Maintain TP of USD68 based on 20x 1-year forward
3Q results likely to be ahead of peers
We expect Cognizant to report 6.5% q-q revenue growth in 3Q FY11F, ahead of peers
Infosys (5%) and TCS (5.7%) in the quarter. The CoreLogic India acquisition (which was
announced on July 26, 2011) would add USD5mn to 3Q revenue, according to
management. We expect the EBIT margin to show a slight improvement of 10bps q-q.
Cognizant hedges 50-60% of its revenue and takes hedges for 2-3 years ahead on a
rolling basis. For 3Q-4QFY11F, the company has hedged at an average USD/INR of
~48.1. We do not expect any material benefits to 3QFY11F margins from the rupee
depreciation.
Maintain Neutral and TP of USD68
We remain Neutral on Cognizant on anticipated moderation in growth differentials vs
other market-share gain-focused Indian IT peers such TCS/HCL Tech. Given our caution
on Cognizant’s BFSI exposure and concentrated services and geographical profile, we
would wait for better entry points in the stock. Our target price of USD68 is based on 20x
one-year rolling forward EPS of USD3.4.
Valuation methodology
We value Cognizant at 20x our one-year forward earnings per share estimate of USD3.4,
which is at a 10% discount to its long-term average to reflect higher risk in the macro
environment and risks related to higher BFSI exposure.
Risks to valuation
The key risks include: 1) a faster-than-anticipated demand slowdown; 2) breakage of
pricing discipline in the industry; and 3) rupee appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Revenue outperformance
moderation and BFSI exposure
could weigh on valuations
3Q FY11F: Expect Cognizant to post revenue growth ahead of peers
We expect Cognizant to report 6.5% q-q revenue growth in 3Q FY11F.
EBIT margins are likely improve slightly by 10bps q-q. Management
commentary on Europe and demand will likely be keenly watched.
Action: Maintain Neutral; wait for better entry points to build in the risks
Cognizant has traded at a premium to its Indian IT peers on: 1) doubledigit
revenue growth outperformance; and 2) margin predictability. We
believe both will continue, but that the growth outperformance gap should
narrow. This, coupled with risks on high BFSI exposure and client
concentration, could weigh on the stock’s valuation, in our view, leading to
a moderation in Cognizant’s premium valuation. We would wait for better
entry points and remain Neutral.
Expect moderation in FY12F growth; FY11F not at risk, in our view
We expect Cognizant to continue to outperform its peer group on revenue
growth despite moderation in our FY12F expectation to 16.5%, while
keeping our FY11F expectation intact at 32.6%. We expect USD revenue
CAGR of 24%, flattish EBIT margins and EPS CAGR of 17% over FY10-
12F.
Catalysts: Economic stability, higher growth
Valuation: Maintain TP of USD68 based on 20x 1-year forward
3Q results likely to be ahead of peers
We expect Cognizant to report 6.5% q-q revenue growth in 3Q FY11F, ahead of peers
Infosys (5%) and TCS (5.7%) in the quarter. The CoreLogic India acquisition (which was
announced on July 26, 2011) would add USD5mn to 3Q revenue, according to
management. We expect the EBIT margin to show a slight improvement of 10bps q-q.
Cognizant hedges 50-60% of its revenue and takes hedges for 2-3 years ahead on a
rolling basis. For 3Q-4QFY11F, the company has hedged at an average USD/INR of
~48.1. We do not expect any material benefits to 3QFY11F margins from the rupee
depreciation.
Maintain Neutral and TP of USD68
We remain Neutral on Cognizant on anticipated moderation in growth differentials vs
other market-share gain-focused Indian IT peers such TCS/HCL Tech. Given our caution
on Cognizant’s BFSI exposure and concentrated services and geographical profile, we
would wait for better entry points in the stock. Our target price of USD68 is based on 20x
one-year rolling forward EPS of USD3.4.
Valuation methodology
We value Cognizant at 20x our one-year forward earnings per share estimate of USD3.4,
which is at a 10% discount to its long-term average to reflect higher risk in the macro
environment and risks related to higher BFSI exposure.
Risks to valuation
The key risks include: 1) a faster-than-anticipated demand slowdown; 2) breakage of
pricing discipline in the industry; and 3) rupee appreciation.
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