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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
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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
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