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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Delivers strong 3.1% organic revenue growth defying seasonality CTSH reported 6.2% revenue growth to US$2.74 mn. The growth includes US$80 mn from Trizetto acquisition that was consolidated for part of the quarter (40 days). Excluding Trizetto acquisition, revenues grew 3.1% in US$ terms and 4.1% in c/c. We note that CTSH completed acquisition of two more companies in the December quarter, i.e. Cadient for US$30 mn and Odecee— revenue contribution from these two acquisitions was extremely small in the quarter. The December quarter was impressive on two counts—(1) strength in financial services that grew 3.6%. Growth in the quarter was led by ramp-up of a large deal in insurance, and (2) strong growth in the healthcare vertical that grew 5.6% on organic basis. Life sciences and payers segment delivered robust growth. These verticals combined accounts for about 70% of CTSH’s revenues. Starts 2015E guidance on a conservative note; expects c/c organic revenue growth of ~14.5% CTSH has guided for at least 19% growth in revenues to US$12.21 bn for CY2015E. The guidance includes revenues from Trizetto acquisition that was completed in November 2014. We believe that the guidance excluding Trizetto acquisition stands at 12.5% in US$ terms and 14.5% on organic basis. We would not be surprised if the management would have built extra cushion in the guidance noting the miss in the previous year. Growth guidance is healthy, in our view. The company has guided for 5% revenue growth for the March 2015 quarter (includes revenues from three acquisitions, including Trizetto, that were consolidated for part of the quarter). Management commentary on demand and overall hiring is encouraging CTSH sees flat to modest 2-3% growth in IT budgets in 2015. The growth drivers in banking clients—cost take-outs and regulatory compliance—sustain while focus on digital initiative has increased. CTSH is gaining traction in end-to-end managed services in insurance. Healthcare— changing regulatory landscape and CTSH’s augmentation of capabilities through acquisition would help CTSH deliver strong growth for several years. Demand in retail vertical has improved. Europe is opening up to outsourcing partly led by weakness in economy. Overall, CTSH indicated strong order pipeline; deal activity has decisively improved over the past six months. Third consecutive quarter of strong hiring (~8,100 in December) corroborates confidence on growth. Maintain attractive coverage view CTSH’s guidance may not excite but is creditable after considering the currency impact and possible cushion built in to the guidance. We believe that demand for 2015 will be robust led by (1) timely closure of IT budgets, (2) positive commentary on large deal pipelines. ISG’s outsourcing index was strong with record US$5.8 bn of ACV, (3) likely improvement in IT budgets of BFSI clients, especially in Europe. Of course, the recent results of US banks were disappointing and need to be closely tracked, and (4) continued market share gains in Europe. The key risk for the sector is margin headwinds, especially arising from appreciation of rupee against EUR, AUD and GBP. However, our economist believes that the rupee will weaken and forecast `63 and `65 as the Re/USD rate for FY2016E/17E. This should take care of crosscurrency headwinds and some part of wage revision. Infosys and Tech M are our top picks.

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf