Published on 21/02/2020 10:41:18 AM | Source: HDFC Securities Ltd

Update On Cognizant Technologies Ltd by HDFC Securities

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Steady 2020, CTSH work-in-progress

Cognizant (CTSH) posted revenue above its guided-band at USD 4.28bn, +0.8/3.8% QoQ/YoY (decelerated to +4.2% YoY CC vs. 5.1% YoY CC registered in 3Q). CY19 revenue stood at USD 16.78bn, 5.2% CC (includes 3.2% organic) and CTSH guided for 2-4% YoY CC (1-3% organic) after - 110bps impact from the exit of certain content services business in CY20E. 1QCY20E revenue guidance stood at +2.8 to 3.5% YoY CC, which factors -60bps impact from content services.

BFSI and Healthcare verticals continued to lag the overall growth with an ‘unchanged’ muted outlook, impacted by few large banking accounts (capital market segment). Within BFSI, growth was insurance-led; NorthAm large banks’ outlook was less muted than Europe large banks that face bigger macro risks, yet stable budgets seen for CY20. Outlook for CMT vertical mixed with positive commentary for Communications segment (+ve for TechM), offset by content services business impact in Technology.

CTSH lags industry growth impacted by BFSI, Healthcare verticals and CTSH-specific factors (business re-calibration following the leadership change). Our checks suggest no material increase in competitive intensity. Prefer INFY, HCLT and TechM from tier-1 IT.


Key Highlights

* Digital revenue stood at 38% of revenue and is growing at >20%.

* Focus on alliance partnerships (Salesforce, Temenos, Pega, etc), strengthening joint-GTM and increasing investments to hire solution architects.


* Pricing pressure in legacy renewals continue and offsets include automation, pyramid, COLA commercials & billing alignment and pricing in digital.

* Voluntary attrition was lower YoY, new Chief People Officer (former Walmart) and recently appointed new CMO.

* Australia and Japan have stronger growth potential within APAC geography. CTSH planning for a bigger footprint in Europe and may get acquisition heavy beyond CY20.

* Re-structuring exercise ‘Fit for 2020’ on track entailing re-structuring charges of USD 150-200mn for CY20 resulting in annualised gross cost savings of USD 500- 550mn with

1) Removal of 5-7,000 net headcount (mid-level),

2) Re-skilling & re-training 5,000 mid-level resources, and

3) Exit from certain content services business (headcount exit of 5-6,000 and annualised revenue impact of USD 225-250mn).


Quarterly Highlights

* BFSI (34.3% of rev) declined 1.6% QoQ with NorthAm BFSI dip at 1.9% QoQ and steeper Europe BFSI dip at 3.2% QoQ. For CY19, BFSI posted +1.6% YoY CC, Healthcare (28.5% of rev) posted +1% YoY CC, Products & Resources (22.5% of rev) posted 12% YoY CC and CMT (14.8% of rev) posted 13.1% YoY CC.

* Offshore utilisation improved to 85% (vs. 84% in 3Q) and onsite utilisation was flat at 92%; total headcount stood at 292,500, +0.9/3.9% QoQ/YoY.


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