NOMURA - Cognizant

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Reassuring quarter

Results reinforce our confidence on 15% organic

growth trajectory

Action: Growth comfort rises; Buy maintained

Our comfort in CTSH’s growth outlook rises on the back of: 1) management

raising full-year growth guidance by 1pp at the higher end to ~15%; 2) overall

demand commentary remaining positive and 3) management indicating that

the issues which led to the guidance cut in 2Q will not be a drag on growth

after 4Q. Accordingly, we raise our FY15/16F growth expectations by ~1pp

and look for 15% organic revenue CAGR over FY14-16F. Given CTSH’s

comparable revenue growth and better EPS growth vs TCS on our estimates

over FY14-16F, we believe the valuation discount should narrow. Thus we lift

our valuation multiple to 19x (5% discount to our target multiple for TCS vs

10% discount earlier). We reiterate our Buy.

Catalyst: FY15F organic growth guidance of 15%+

3Q: Growth, guidance and commentary reassures

3Q results were above expectations on revenue growth (2.5% q-q vs our

estimate of 2% q-q) and FY14 revenue growth guidance (raised to 14.6-14.9%

y-y). Further, management indicated that: 1) elongated sales cycles are

restricted to only complex deals, while being normal for the rest of the

business; and 2) drag due to client-specific issues will cease after 4Q. As well,

headcount growth of 12% over the last two quarters, which is ~2x the revenue

growth over the same period, should provide comfort on CTSH’s near-term

growth outlook. Adj. EBIT margins were below forecasts (down 150bps vs our

estimate of 90bp fall to 19.5%) on lower utilization, wage and SGA increases.

FY15/16F EPS estimates largely unchanged; TP rises to USD60

We look for revenue CAGR of 19% and EPS CAGR of 18% (including Trizetto

acquisition) over FY14-16F. Our TP rises to USD60 and is based on 19x 1

year forward up to Sep-16 EPS of USD3.16. HCLT followed by CTSH remains

our top Buys in Tier 1 IT.