Technology: CTSH - ends the year with a bang and guides for a robust 2015 :: Kotak Sec, report

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CTSH—ends the year with a bang and guides for a robust 2015. Cognizant reported strong 3.1% qoq revenue growth excluding Trizetto acquisition in US$ terms and 4.1% in constant currency (c/c), impressive for a seasonally weak December quarter. The company has guided for revenue growth of at least 19% in 2015 and ~14.5% on organic basis in c/c. The company outlined reasonable outlook on IT budgets and a robust deal pipeline. Strong results of offshore pure-plays and CTSH guidance should assuage Street concerns on demand. We maintain attractive coverage view.

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NOMURA - Cognizant

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JPMorgan: India IT Services Cognizant: IR Meeting Takeaways

India IT Services Cognizant: IR Meeting Takeaways – separately, we expect demand in the Indian IT sector to start looking up

Earlier this week, our colleagues Tien-tsin Huang and Puneet Jain met with David Nelson, VP Treasurer and IR at Cognizant. As expected, Mr Nelson did not provide an intra-quarter update, but we did get greater clarity on issues that arose from the 1Q results, such as healthcare, Europe and capital deployment. All told, we remain confident in our growth forecast, which is in-line with guidance for 2Q (at the top end) and FY14, and continue to see a low likelihood of meaningful revenue upside given the slow start to the year due to softness in healthcare witnessed in the 1Q results. We remain Overweight CTSH stock, given premium growth and low PEG ratio relative to ACN. CTSH trades at 17.7x our CY15 GAAP EPS (16.3x non-GAAP) vs ACN at 16.5x, while CTSH is growing EPS ~2x faster than ACN; CTSH has $6 in cash/share (or cash is 13% of market-cap).

· Healthcare. At 25% of revenue (60/40 payer/pharma), CTSH’s healthcare practice started the year softer than expected as demand slowed due to: 1) tough comps after a surge of activity from payers in 2H13 surrounding ACA and 2) pharma patent cliff tightening discretionary spend. CTSH remains bullish on the healthcare outlook longer term as drug pipelines inevitably improve and ACA work builds out to include more users and expands to BPO.

· Europe a bright spot. At 18% of revenue, Europe continues to outperform for CTSH as the continent is embracing offshore at an accelerating pace. This corroborates what Accenture suggested on its last earnings call, which likely had a deflationary effect for ACN given its higher onsite mix (at higher rates than offshore). We believe like-for-like bill rates (pricing) in Europe remain stable. Europe is expected to be a geography of above-firm-average growth over the medium to long term for players such as TCS/CTSH/Tech Mahindra/HCLT – these firms have been investing there for some time now, have customized their go-to-market strategies in the various countries in Europe and are now reaching critical scale.

· Capital deployment. CTSH has $3.9B in cash ($6.3 per share), about 40% of which is in the US and we doubt CTSH would bear the cost of repatriating. That said, we still see room for CTSH to step up its cash returned to shareholders (see our note,Cognizant: Compelling Capital Deployment Potential to Shareholders from 3/25/13), but CTSH has said it prefers to maintain flexibility (e.g. for investments, acquisitions, platforms) so we don’t expect a big capital deployment change in the near term beyond opportunistic share repurchases (and CTSH said it would accelerate its pace of buybacks from the $30M repurchased in 1Q, with ~$500M remaining in its authorization).

· Guidance/growth recap. For 2Q, we see revenue growth of 4.3% qoq (guidance at 3.2-4.4%) – recall CTSH dropped its typical “at least” comment to the upper half of its guidance range, so we don’t think 2Q has the usual firepower to produce big upside as it has in the past. For FY14, we see 17% revenue growth, well above NASSCOM’s industry forecasted growth of 13-15% (NASSCOM’s estimate issued in Feb could be stale given soft 1Q).

· Value relative to ACN. CTSH trades at ~7% premium to ACN on our CY15 GAAP estimates, compared to a YTD average premium of 16% afforded to CTSH. We think a bigger premium is warranted given CTSH’s faster growth (JPMe 17% EPS growth for CTSH in CY14 vs ACN at 7%), acknowledging ACN's total return is enhanced by a dividend yield of 2.25%, which helps offset ACN’s slower growth.

· Investment view in the Indian IT space. Among the Indian IT players, we continue to like Infosys, Tech Mahindra and HCLT – all rated OW. We think TCS’s valuation looks a tad punchy in the near term (at 21x forward P/E), but we see it as a core strategic holding in portfolios as gains from leadership compound over time. Compounding tends to be under-appreciated – the longer the timeframe, the greater the compounding gains thus making TCS a core holding, in our view. The India IT sector has clearly fallen off the radar in the wake of a strong wave of preference for domestic sectors (such as financials and industrials) due to the decisive mandate in the national elections for the BJP-led NDA. Such a theme of vigorous sector rotation is likely to be a temporary phenomenon only, in our view, which might well reverse in the second half of the year as firmer signals about the improving health of demand for Indian IT emerge. INR appreciation remains the key risk to our thesis (we continue to work with INR-USD exchange rate of Rs 59-60 for FY15/FY16).

Cognizant reports strong revenue growth in 1QFY13; we maintain our "CY13 better than CY12" thesis :JPMorgan

Cognizant (CTSH, US$64.88, rated OW by our US analyst Tien-tsin Huang)
reported a strong revenue quarter with Q/Q revenue growth of 3.7% in 1QCY13
(including revenues from C1 acquisition). The company maintained its CY13
revenue growth guidance of “at least 17%” Y/Y implying “at least 15.8%”
organic Y/Y revenue growth after excluding US$90 mn for C1 acquisition
revenues. The company guided for 2QCY13 revenues of USD 2.13 billion
implying 5.4% Q/Q revenue growth. The company needs to deliver 3.0% Q/Q
revenue growth in the next two quarters (3Q and 4QCY13) to achieve its annual
revenue growth guidance, which seems achievable. We note that gross margins
declined to 40.6% this quarter, the lowest level since CY2000.
 Cognizant reported 1QCY13 revenues of US$2.02 billion (including C1
revenues) meaningfully ahead of guidance of ‘at least US$ 2.00 billion’ and
JPM expectations. The 3.7% Q/Q growth along with 2QFY13 revenue growth
guidance of 5.4% is encouraging in our view. Importantly, 2QFY13 is likely to
benefit from full quarter of C1 revenues as well, but excluding that also, we
believe organic revenue growth guidance of 4%+ Q/Q is healthy. The company
needs to achieve 3.0% Q/Q revenue growth in 3Q and 4QCY13.
 Cognizant maintained its CY13 revenue growth guidance at 17% (~16% on
organic basis). After Cognizant’s experience last year (CY12) when the
company had to bring down its revenue growth guidance from 23% to 20% after
one quarter into the year, we expected Cognizant to be stay extra conservative in
its guidance – likely a case of once-bitten, twice-shy. We believe the company
would naturally want to get back to the “beat-and-raise” earnings pattern,
which has been the hallmark of its performance versus guidance history except
in 2012. Hence, we expect Cognizant to beat its revenue guidance in CY13.
 However, gross margins decreased to 40.6% in 1QCY13, the lowest level in
the last 13 years. Gross margins declined 190 bps Y/Y and 30 bps Q/Q.
Continuous decline in gross margins impacts a company’s ability to invest in
sales and marketing efforts, which impacts revenue growth in medium-to-long
term. Cognizant has an investment-intensive model (high SG&A) that helps its
growth premium and it needs healthy gross margins to sustain this. Management
suggested that pricing remained broadly flat during the quarter.
 Other Details: Financial Services revenues grew 4.9% Q/Q, while
Manufacturing/Retail/Logistics revenues grew 4.2% Q/Q. Healthcare revenue
growth was relatively tepid at 2.0% Q/Q. Rest of Europe (non-UK) delivered
solid growth of 9.7% (thanks to the C1 acquisition), while revenue growth from
UK was also solid at 5.0% Q/Q. Europe (in total) grew 6.7% Q/Q (organic
growth of about 4% Q/Q) meaningfully ahead of company average. North
America reports revenue growth of 3.0% Q/Q.
 Investment view. We continue to think that CY13 will be a reasonably better
growth year for IT Services than CY12. We have OW ratings on Infosys &
HCLT. TCS’s (N) valuations look a tad punchy in the near term, but we see
TCS as a core holding for portfolios as gains from consistent leadership
compound over the long term. The math of compounding tends to be underappreciated – the longer the timeframe, the greater the compounding gains. That
said, the evolution of the immigration bill needs watching (as it relates to visas)

Cognizant - Good show; positive vibes for Indian IT; Q2CY12 Result Excerpts: Edelweiss

Cognizant’s Q2CY12 revenue at USD1.80bn, up 4.9% QoQ, was marginally ahead of Street estimate and 30bps higher than company’s guidance of 4.6% QoQ growth. For Q3CY12, it guided for revenue of USD1.88bn (up 4.4% QoQ) and has maintained its annual revenue guidance of USD7.34bn, implying growth of 4.5% for Q4CY12, which we believe is achievable. The quarter saw robust growth in financial services (FS; 6.1%) and manufacturing/retail/logistics (MRL; 7.1%). Within FS, traction improved in banking led by cost optimisation projects while outlook for pharmaceuticals within healthcare remains muted. Management expects growth in balance quarters to be driven by ramp up of clients won in past few quarters.

Cognizant (CTSH) Buy: Healthy Financial Services Demand Supports "Buy"Citi Research

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Cognizant (CTSH)
Buy: Healthy Financial Services Demand Supports "Buy" View
 Positive outlook for Financial Services business — CTSH indicated that its
outlook for the Financial Services segment (~41% of revs) was healthy, with
strong demand for Insurance (see next bullet), good trends in retail banking
(driven by channel partnerships) and steady investment bank spending (seemed
driven mostly by wallet share gains with a 4Q11 offset).
 Several drivers to Insurance client demand — Approx 1/3rd of CTSH’s
Financial Services revenues (~14% of overall revenues) are from the insurance
vertical (life, annuities, retirement, and P&C). In 2011, this business grew faster
than total Financial Services growth of ~30% y/y and continues to track well in
2012. Insurance growth is being driven by Package Implementations, Remote
Infrastructure and BPO – the latter has made significant progress over the last
two years, as CTSH saw a significant uptick in outsourced policy administration,
claims work and incremental underwriting. Other growth areas include complex
life/annuity projects around technology to provide retail advice at the POS, and
work with portals as clients incrementally utilize a B2C model rather than just
selling through agents/brokers. On a regional basis 5% of insurance revs come
from Asia-Pac (significant growth), 20% from Europe (no meaningful slowdown)
and 75% from US clients (steady-to-strong).
 Overcoming 4Q11 Europe weakness — 4Q11 Europe weakness can be largely
explained by F/X and some client specific actions (change in onsite-offshore
ratio). There was also a slowdown in development projects (hurts right away) with
the transition to more maintenance work likely to help future quarters. CTSH
indicated that it won 14 logos in Europe in 4Q11 and is ramping a few large deals
currently (e.g., Volvo has been announced). This bodes well for 2012. Finally the
T-Systems partnership continues to yield generally good results.
 Consulting / Domain expertise a key for future — Clients expect IT consulting
services in addition to delivery and CTSH investments are yielding results as
Consulting continues to grow faster than other lines – it is not dilutive to margins.
 2012 guidance assumptions — 2012 revs growth guidance of “at least” 23%
y/y and EPS of “at least” $3.43 is based on several factors (1) customer
retention/ loyalty is high – helps wallet share; (2) investing in creating new
capabilities; (3) focus on healthcare (ICD-10) and financial services regulations
opportunities; (4) retail segment cost cutting initiatives and investments in
technology solutions for new channels and CRM; (5) consulting capabilities help
to gain mind share – there is a lot of focus on management consulting and
domain knowledge; and (6) Global expansion – Europe and APAC. Guidance
does assume macro volatility and some European weakness as well.
 Reiterate Buy rating on CTSH and $88 target price — With the 2012 guidance
debate behind us, investors should now focus on CTSH’s underlying
fundamentals, which are quite strong. Although 1Q12 has started slowly, ramps
of signed contracts, continued market/wallet share gain and multiple areas of
robust client demand should lead to sequential revenue acceleration over the
next couple of quarters. This sets up CTSH well from an expectations standpoint
vis-à-vis its initial 2012 guidance. The stock currently trades at a 2012E P/E of
around 20X and 18X on a cash adjusted basis, which we view attractive given
our expectation of 20%+ EPS growth over the next three years.

Cognizant : Upgrade to Buy :Nomura research,

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Upgrade to Buy
Valuation premiums to tier-1 IT
likely to sustain on highest
comfort on revenue growth


Action: Upgrade to Buy on market share gain focus and predictability
We expect Cognizant to register best-in-class revenue growth of 28%
CAGR over FY10-12F (compared to 12-20% for its peers), owing to gains
from trends of 1) consolidation and 2) increased regulatory spending. We
like its reinvestment focus to drive higher growth and derive comfort from
the 18-23% revenue growth (vs our est. of 18% growth earlier) indicated
by its management incentive target. The stock’s valuation has corrected
from 26x to 19x 1-yr forward earnings in 2011, despite better-than-peer
group performance. Given the anticipated growth outperformance vs
peers, we find the current valuation of a 10% premium over Infosys (vs
historical premium of ~20%) attractive and upgrade the stock to Buy.
Client connect in BFSI/recession-proof Healthcare to drive growth
We expect Cognizant to outperform on its 1) well entrenched position in
Healthcare (27% of revenue, which grew at ~40% on an LTM basis) where
we see limited competition from tier-1 IT and which should continue to
show strong growth as in the last downturn (25% y-y) driven by regulation
spending, and 2) superior client connect and domain capability in BFSI
where consolidation, in-house to offshore and regulation should drive
growth.
Catalyst: Outperformance in BFSI (41% of revenues) over peers
Valuation: TP raised to USD82 based on better FY12F outlook
We expect USD sales CAGR of 28% and EPS CAGR of 20% over FY10-
12F. Our TP rises to USD82 (based on 20x 1-yr forward earnings) on
rolling forward our valuation base and higher FY12F growth expectations

Cognizant results ‐ Q4CY11 guidance disappointing: Edelweiss,

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Cognizant’s Q3CY11 revenue at USD 1.6bn, up 7.3% Q‐o‐Q in organic terms, was
higher by 2% over its guidance. It stated that there is no slowdown in decision making
and that clients are shifting most cost containment initiatives towards global delivery
(read offshore/low cost destinations) and deploying the consequent cost savings on
discretionary projects (consulting/data analytics). It expects 2012 budgets to remain
stable with an upward bias and is confident that clients will take up more offshoring
initiatives. Despite the bullish commentary it guided to organic revenue growth of
just 2.8% Q‐o‐Q for Q4CY12. The tier‐1 Indian IT companies provided similar
commentaries with TCS indicating that 2012 budgets would remain stable. Overall,
Cognizant is seeing a robust growth in Infrastructure Management Services, BPO and
CRM/Analytics. We prefer TCS due to its diversified portfolio and positioning as a
primary offshore vendor and HCLT due to its strong IMS and restructured platform
BPO offering.
• Revenue at USD 1.6 bn grew 32% Y-o-Y with EBITDA margins stable at 20.2% and
net income at USD 227mn, ahead of Street expectations and growing at 12% Y-o-Y.
• Revenue growth of 11% Q-o-Q in its Healthcare business which contributes 26% to
revenue. BFSI grew 7% Q-o-Q contributing 41% to revenue and Manufacturing and
Retail grew 5% Q-o-Q, contributing 20%.
• North America business, accounting for 78% of revenue, grew 8% Q-o-Q while
Europe grew 5% Q-o-Q, contributing 18% to revenue.
• It saw a slowdown in Europe but stated that most CIOs in European client
organizations indicated that they would defend their 2012 budgets and continue to
take up discretionary projects out of savings from shifting routine work offshore.
• Seeing a good demand for Infrastructure Management Services, high-end BPO,
Analytics and Customer relationship management.
• The guidance indicates 2.8% Q-o-Q growth in organic revenues which is the lowest
Q-o-Q growth in the last seven quarters.
• It saw price increase of 4%-5% Y-o-Y mainly due to successful price re-negotiations
in 2010. It expects pricing to remain stable in CY12.
• It derives only 31% revenues from fixed price projects compared to at least 40% for
the tier-1 Indian IT companies. This is surprising as we believe clients are
compelling vendors to improve efficiency by shifting to fixed price models.

Cognizant Results: Implications for Indian IT 􀂉 CLSA

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Cognizant Results: Implications for Indian IT
􀂉 Cognizant (CTSH US, Not Rated) will report Sep-11 qtr (3Q11) results
and give updated guidance for 2011 on 2nd Nov, pre US market open.
􀂉 For 3Q11: 8.8%QQ revenue growth is possible (c.f. 5.7% guidance).
This is likely to be at the top end of peers in the IT off-shoring space, inline
with Cognizant’s historical sector-leading performance.
􀂉 For 4Q11 (Dec-11): We expect revenue growth guidance of ~4.5%QQ.
􀂉 For full year 2011: We expect revenue growth guidance to be increased
to ~34%YY growth from at least 32%YY currently.
􀂉 While the results will once again re-inforce Cognizant’s sector-leading
position, the street will look for cues on 2012 trajectory.
􀂉 We remain cautious on the IT services space for now.
Cognizant: Set to become the 2nd largest Indian IT vendor?
Cognizant employs over 118,000 professionals, making it the 3rd largest offshore
IT services vendor after TCS and Infosys. While we do not cover the stock, readthrough
from its results is important for peer stocks, and we expect the upcoming
report on 2nd November to be a strong one though it is unlikely to give clarity on
the key question that matters; how will 2012 demand shape-up?
In Mar-09 quarter, Infosys’ quarterly revenues were 50% higher than Cognizant
and that gap will likely be reduced to just 8% in the Sep-11 quarter. Cognizant’s
revenue now trails Infosys by just 2 quarters and assuming Infosys and Cognizant
continue at their recent growth rates, Cognizant will most likely overtake Infosys on
quarterly revenues by the end of 2012. Interestingly, the quarterly revenue gap
between Infosys and Cognizant in Sep-11 will likely reach the one seen back in
Dec-02 quarter, almost 9 years back.

Cognizant: No slowdown impact likely in FY11F- Nomura research,

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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.

Cognizant Technologies (CTSH, Buy):: Goldman Sachs:: Second Annual IT Services Trip

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Cognizant Technologies (CTSH, Buy, covered by Julio C. Quinteros Jr.)
1) 2011 trends remain firm, 2012 growth expectations remain in question -
Management reiterated their confidence in achieving 32% revenue growth guidance
for 2011; our model currently forecasts total revenue growth of 34% yoy. Consistent
with our 8/15 industry report “Peering through the summer fog, shifting to 2012
valuation with a more defensive stance”, we remain guarded on growth expectations
into 2012 with our model currently suggesting some moderation in revenue growth to
about 20% yoy.
2) Consistent with expectations, Europe remains on track; Financial Services
continues to grow, but remains biggest source of investor concern – Consistent
with our expectations, Europe (18.7% of revenues) appears to have regained its footing
into 2H2011 as the company appears to have effectively offset some recent contract
drags (e.g., completion of post-M&A integration work, etc.). Investors remain focused
on CTSH’s large financial services exposure, which at 41% remains among the highest
in our coverage group. However, based on company commentary most projects in the
financial vertical remain on track for 2011; given the upcoming capex and budgeting
cycle important for the pace of spending into 2012 especially for the more
discretionary application development revenues (50% of revenues).

3) Leading indications from headcount plans suggest sustained hiring – Consistent
with our supply driven model, we view headcount additions as a key leading indicator
and on this front it appears that CTSH remains firm in its current recruitment plans
with a focus on campus recruiting (Day 0 slots at most campus locations). Looking
ahead, the company has shifted its focus to its 2012 campus hiring efforts

for details of remaining company see link

Goldman Sachs:: Second Annual IT Services Trip: LT drivers exist, 2012 outlook hazy

Technology: Cognizant reports strong 2Q; reiterate our positive stance on industry demand:: Kotak Sec

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Technology
India
Cognizant reports strong 2Q; reiterate our positive stance on industry demand.
Cognizant’s strong 2Q earnings report (+8.3% qoq US$ rev growth), robust (though
still conservative) guidance for the next two quarters, and confident undertone in
management commentary serve as additional proof-points to our thesis on strong
demand environment for the Indian IT services industry. Weakness at Infosys/Wipro is
company-specific and not reflective of the demand environment, notwithstanding weak
macro indicators. We remain positive on the sector. BUY TCS/Infosy


The macro/micro dichotomy continues
Cognizant’s strong, industry-leading, consensus-beating 8.3% qoq US$ revenue growth begs the
oft-asked (in the past 2-3 years) question again – why the dichotomy between weak macro
indicators and strong micro ones coming from offshore IT services players like TCS, Cognizant, and
select midcaps? There is no clear answer to this one, but CTSH management’s earnings
commentary provided some useful indicators; we paraphrase below
` ‘there is significant pressure on clients to reduce costs and drive innovation/ transformation at
the same time – global delivery model of the offshore players is critical to achieve this dual
objective, creating substantial opportunities for Indian IT services players’
` ‘macro uncertainty has increased but clients understand that this is the new normal and are not
holding back decision making’
` ‘at an aggregate level, there is very strong demand for offshore IT services in the market, even
as CTSH’s market share gains are driving industry-leading revenue growth’
` ‘clients (especially in the BFSI vertical) are looking at increasingly variablizing their cost structures;
this is driving growth for the vendors even as they are cutting in-house jobs’
CTSH’s earnings report provides several strong demand indicators for the industry
` 8.3% sequential US$ revenue growth to US$1,485 mn - handsome beat of consensus
expectations and the company’s own guidance for the quarter
` Robust, though still conservative in our view, rev growth guidance of 5.7% qoq for the Sep
2011 quarter; this builds in around 0.4% kicker from a recent acquisition
` Upward revision in CY2011E revenue growth guidance – to 32% from 29% at end-1QCY11;
the recent acquisition contributes less than 0.5% point to the revision
` Broad-based growth across verticals, geographies, and service lines
` Strong net employee additions at 7,000+, taking CTSH’s end-Jun 2011 headcount to 118,300
` Management’s commentary on strong pipeline, and no usual summer lull in decision making
` Positive commentary on pricing momentum
` Record number of promotions ever and increasing investments in capability/ capacity building


CTSH 2QCY12 results – other key highlights
` Revenue growth was broad-based. Among verticals, healthcare grew the fastest (+10%
qoq), even as BFSI (+7.5% qoq) and manufacturing/retail/logistics (+7.3% qoq) also
showed robust growth. Geographically, North America led with 8% qoq growth, while
Europe reported 5.3% constant currency qoq revenue growth.
` The company indicated that it has been able to back-fill the loss of M&A-related revenues
from its European BFSI customers.
` Application Development (+10.6% qoq) grew faster than Application Management for
the 6
th
 consecutive quarter, indicating robust momentum in discretionary spend areas.
` Pricing was up marginally on a qoq basis; the company indicated positive pricing
momentum.
` Net headcount addition was a little over 7,000 for the quarter. Attrition was stable at
around 15.2%, quarterly annualized.
` The company ended the quarter with US$2.3 bn of cash and equivalents. Hedges
outstanding were US$2.8 bn.
` Utilization inched up marginally, both onsite and offshore.
` Visa situation is tight but the company sees no operational disruption.

UBS: Indian IT Services Read-through from Cognizant 2Q results

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UBS Investment Research
Indian IT Services
R ead-through from Cognizant 2Q results
􀂄 Cognizant (CTSH) results more in line with TCS, HCL Tech
CTSH reported 2Q revenue growth of 8.3% QoQ, beating UBS/consensus estimate
of 6.4/6.1% QoQ. GAAP EPS was $0.67 vs. UBSe/consensus of $0.67/0.66. CTSH
results are more in line with numbers reported by TCS and HCL Tech, suggesting
that the weakness seen in Infosys and Wipro are company specific.
􀂄 Sector read through –strong demand outlook, market share realignment
CTSH remains upbeat on demand outlook despite the ongoing economic
uncertainty, as reflected in the 5.7% QoQ revenue growth guidance, which is in
line with 2Q guidance provided by the company. 2Q is seasonally the strongest for
CTSH, but the management expects 3Q could remain strong due to market share
gains and strong deal flow.
􀂄 Vendor differentiation emerging by market share gains
Earlier this year, we highlighted the view that lower-margin vendors like CTSH are
gaining market share, and there is likely to be divergent trends in growth rates
amongst Indian IT vendors depending on market share gains (refer our report
“2011: a year of tough competition” dated 8 Mar 2011). We believe that early
signs of this trend are already visible, and competition is likely to intensify further.
􀂄 Maintain cautious view on sector
We remain cautious on the sector on expectations of a likely slowdown in demand
versus current estimates by end 2011/early 2012. We also view increasing
competition as being non conducive for pricing tailwinds, as seen in the weak
pricing trends for the larger Indian vendors in 1Q FY12.

Cognizant: Europe performance remains the swing factor: Nomura

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Europe performance remains the swing factor
Revenue growth
outperformance key for stock to
sustain premium valuations


2Q FY11F: Expect Cognizant to post revenue growth ahead of peers
We expect Cognizant to report 8% q-q revenue growth in 2Q FY12.
However, we believe there could be downside risk to our expectation as
management has guided for 3Q to be the stronger quarter for Europe (in
contrast to 2Q for North America) on account of ramp-downs in UK bank
M&A integration projects. EBIT margins are likely to decline by 100bps on
account of wage hikes, we believe.
Revenue growth guidance likely to be raised to 30%
We expect Cognizant to marginally raise its FY11F revenue growth
guidance to 30% (from 29%).
Action: Valuations limit upside, wait for better entry points
We expect the revenue growth differential between Cognizant and Infosys
to narrow from 14pp in FY10 to about 8pp in FY11F, largely on: 1) smaller
non-US presence in a diversifying demand scenario; and 2) smaller
contribution from faster-growing emerging service lines (BPO, IMS and
EAS). At its current valuation of 22x FY12F earnings, we see limited
valuation upside and would wait for a better entry point. We remain
NEUTRAL; our USD83 target price is based on 23x one-year rolling
forward earnings. Among tier-1 stocks, we prefer Infosys and HCL Tech.
Catalyst: Outperformance of tier-1 peers in revenue growth
A return to material outperformance on sequential revenue growth over
tier-1 peers after 3 quarters of limited outperformance and FY11F revenue
growth guidance of more than 31% would likely be upside triggers.

Cognizant: Pullback of Late Is an Over-Reaction; Multiple Reasons to Favor CTSH! : Bernstein

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Cognizant's stock has pulled back yesterday and today, and we are seeing a huge volume of questions about
this. We see two concerns, both of which we believe are substantially overblown: 1) concern about
Cognizant being suspended from Business Executive Program (BEP) of the US Embassy in India, a
program that enables expedited or "fast track" applications for US visas, and 2) concern about a call being
made by an analyst in India that CTSH's quarter is progressing somewhat poorly due to issues at Lloyds.
The visa-related concern is overblown because this should not be a material issue, and it seems prone
to get rectified soon:
 The suspension of Cognizant from the Business Executive Program does not impact the company's
ability to obtain US visas and to deploy needed employees to the US for customer projects. It simply
closes (likely only temporarily) Cognizant from the "fast track" application process for the time being.
Note: HCL, Accenture, IBM, and TCS were also suspended from this fast-track visa application
program, though IBM and TCS have now been reinstated.
 News about the BEP program is hitting the press today. But we think Cognizant's suspension from this
program occurred in March, so Cognizant management would have been aware of this situation prior to
issuing its last guidance.
 The reason for the suspensions appears to be paperwork discrepancies in visa applications. And, we
think Cognizant should be positioned to clarify such discrepancies and become reinstated to this BEP
visa program reasonably soon.
 We think some investors have equated Cognizant's BEP suspension with Infosys's visa-related subpoena.
But, we think Cognizant's BEP suspension is quite minor compared to Infosys' potential visa issue
(stemming from a whistle-blower case). Note: Infosys received a subpoena from a US court, following
allegations by a former Infosys employee that Infosys was systematically violating US visa regulations.

IT Services: Back Up Truck on Cognizant; Accenture Outlook Solid; Capgemini's Pipeline Comment Misunderstoo: Bernstein Research,

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IT Services: Back Up Truck on Cognizant; Accenture Outlook
Solid; Capgemini's Pipeline Comment Misunderstoo


Highlights
Today's piece summarizes findings from our latest channel checks on the consulting/systems integration
and offshore markets and from Capgemini's analyst day, including offline discussions with several
Capgemini executives.  In addition, we've further studied recent concerns hurting Cognizant's stock, and we
address basic questions facing Accenture ahead of its June 23
rd
earnings report.  Key conclusions include:
 Heightened concerns of late about Cognizant's Q2 are unfounded, and we think investors should take the
opportunity to aggressively buy Cognizant following its recent pullback.  We are reinstating Cognizant
as our best idea.
 Capgemini's Analyst Day comment about "a plateau in its systems integration pipeline" has been
misunderstood.  This comment should not be cause for concerns about a "double dip" in demand, with
our view on this front confirmed by our discussion with Capgemini's CFO.
 Following its pullback off of its all-time high stock price due to Cognizant / Capgemini related concerns
that we think are unfounded / misunderstood, Accenture's risk/reward now looks more attractive ahead of
its upcoming May quarter earnings report.
Findings from Capgemini's analyst day and from our broader industry checks on the consulting/
systems integration and offshore markets

IT Services – Cognizant 1Q11 results read through:: RBS

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Cognizant's upward revision of CY11 revenue growth guidance to at least 29% (from 26% earlier)
with guided qoq growth rates of 5-6% from 2Q-4Q11 indicates continued robust demand visibility
for IT services. This is in line with our positive bias for Indian IT services with buys on Infosys,
TCS and HCL Tech.

Cognizant: Off the Tracks, or Temporary Setback? Bernstein Research,

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Highlights
This piece evaluates Cognizant's Q1:11 earnings report, concluding that Cognizant should be a sound buyon-
the-dip opportunity.
We're revising our CY11 EPS (to $2.82 from $2.84) and CY12 EPS (to $3.52 from $3.55) due to the
following factors: slightly lower revenue growth assumption for CY11, modestly higher non-GAAP
operating margin (due to upside reported in Q1:11), increased assumption for stock compensation expense,
and modest increase in tax rate. Also, we are slightly revising our CTSH target price of $88.00 (vs. prior of
$88.75), derived by applying a 25.0x multiple (unchanged) to our new CY12 EPS estimate of $3.52.
We are disappointed that Cognizant's Q1:11 revenue was below our expectation (i.e., achieved sequential
revenue growth of 4.6%, only in line with consensus and below buy-side expectation of 5.5-7.0%). But we
see six reasons that CTSH's stock should represent a good buy-on-the-dip opportunity:
 First, growth drag from Europe should not be lasting: We think Cognizant's less-than-stellar sequential
growth in Q1:11 was due to ramp-downs in post-merger-integration business in the UK. Looking
forward, we think this headwind is prone to subside between now and Q3:11, plus it seems that a strong
pipeline of deals are closing in Europe and should contribute to deal ramp-ups between now and Q3:11.
Meanwhile, it's clear that growth and demand trends in the US remain healthy.
 Second, we think Q2:11 (Cognizant's seasonally strongest quarter for sequential growth) is prone to
bring revenue upside: Cognizant's sequential growth guidance for Q2:11 calls for "at least" 5.7% (vs.
consensus of 4.9%), and we think this guidance could prove to be conservative, especially given that
Q2:11 should receive a boost from currency and potentially from pricing. Note that pricing improved
sequentially in Q1:11 by 2%, as new pricing terms likely kicked into gear during Q1:11, with some
incremental potential for continuation into Q2:11, in our view.
 Third, we do not think offshore demand is "broken": Investors are asking whether offshore demand is
running into meaningful barriers. We think INFY's weak recent growth results are largely attributable to


company-specific issues (e.g., leadership transition, transition challenges in trying to move up the food
chain), and CTSH's Q1:11 disappointment (vs. high expectations) was largely due to a growth drag from
merger-integration deal ramp-downs. We assert that the "structural" issue involved is that the offshore
market began its growth rebound quite early in the recovery cycle – i.e., in September 2009 – and is no
longer seeing incremental growth boosts now that we've moved into a later-cycle demand phase. Still,
offshore demand is quite healthy, and we think expectations for CTSH to achieve north of 30% revenue
growth in 2011 remain quite feasible (we are now forecasting 32.8% revenue growth for 2011). As an
additional encouraging data point (Exhibit 9), Cognizant's sequential headcount growth has been between
7% and 9% in each of the past three quarters.
 Fourth, Cognizant should be helped disproportionately by transformational services demand: Because
of CTSH's distinctive onshore client relationship capabilities and industry vertical focus (as explained in
our past research), we underscore that CTSH should benefit more than other Indian firms in this latercycle
demand phase (which we maintain is lined with strong demand for transformational services, as
opposed to the fast-payback deals that dominated earlier in the recovery cycle).
 Fifth, Cognizant's share-gaining prowess (which we think is being extended) is underestimated in
consensus numbers: As shown in our prior research, Cognizant's Y/Y revenue growth results exceeded
the tier-1 Indian firms (TCS, Infosys, and Wipro) as a group by an average of 17.1 percentage points
during 2003 to 2010. Yet, according to consensus estimates, Cognizant's revenue growth is expected to
beat these tier-1 Indian firms by only 5.1 percentage points in 2011, and Cognizant's consensus Y/Y
revenue growth for Q4:11 is only in line with that of the tier-1 Indian firms as a group. We strongly
think Cognizant is likely to achieve materially above-peer growth, thus beating consensus.

CTS: Good is no longer enough :: Nomura

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Good is no longer enough
Revenue growth guidance fails
to excite; limited valuation
upside


Action: Valuations limit upside, wait for better entry point
Cognizant’s lower-than-anticipated revenue growth in 1QFY11 and its
FY11 revenue growth guidance do not provide enough triggers for an
increase in target price. While we like Cognizant for its growth
outperformance and relative margin stability, at the current valuation of
24x FY12F earnings, we see limited valuation upside and would wait for a
better entry point. Maintain NEUTRAL.

Not an exciting quarter from the growth leader; however commentary and 2QCY11 guidance keep our positive outlook intact for Indian IT: JP Morgan

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Cognizant, covered by our US analyst Tien-Tsin Huang, reported 1Q11 revenues
of $1,371MM (vs. guidance of ‘at least’ $1,360MM) implying Q/Q revenue
growth of 4.6%. Though revenue growth and CY11 guidance are in line with
consensus, Tien-Tsin expects Cognizant to report ahead of consensus. Cognizant
is set to become the third-largest IT offshore company after TCS and Infosys
by Jun-11. Also, Cognizant has emerged larger than Infosys in the US
(behind only TCS) while drawing level with Infosys in BFSI (again only
behind TCS), to cite two milestones in its journey of industry-leading growth.
CTSH guided for 2Q CY11 revenues of ‘at least $1.45B’. Strong Jun-11 quarter
guidance of 5.8% Q/Q growth points to a better Jun-11 quarter for Indian IT.