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Published on 21/12/2020 12:12:01 PM | Source: Motilal Oswal Financial Services Ltd

IT Sector Update - Cognizant`s Q3 earnings highlights broad based recovery By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #IT Sector #Sector Report #Motilal Oswal Financial Services Ltd

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Cognizant’s Q3 earnings highlights broad based recovery

Company specific BFSI stress an opportunity for peers

* Cognizant’s Q3 2020 revenue growth (+6% QoQ) was in-line with the strong performance from Indian IT services peers, with Digital (42% of revenue) delivering double digit YoY growth. It also narrowed its 2020 revenue growth guidance (+0.7% YoY comparable growth) to the upper end of its target band.

* Management indicated a V shaped demand recovery, especially in Digital space. They also highlighted increased focus on Cloud opportunity (dedicated business group for AWS and Azure), which we expect as one of the key areas of focus in the industry going forward.

* While Cognizant’s BFSI vertical saw a smart recovery in Q3 (+5.2% QoQ), the management commentary indicated weakness in the vertical for next few quarters on the back of company specific issues like small pipeline and client loss. We see this as an opportunity for its IT services peers like Infosys and TCS to continue to gain wallet share at key clients. Cognizant’s positive commentary in the Capital markets recovery also bodes well for the industry.

* Similar to announcements from large cap peers, Cognizant will also announce promotions and bonuses during this quarter, which will impact their margins. We see this as an acknowledgement in the industry that supply pressure on employee front remains a concern despite historical low attrition.

* Cognizant also indicated that the industry is currently going through vendor consolidation and captive takeover opportunities, although it plans to be selective in this. We see this as a positive for the Indian IT services companies.

 

 Increasing order bookings and deal pipeline

* The company witnessed strong business momentum with total bookings growing by 25% YoY (+15% YTD) and digital bookings growing at 40% on YTD basis. They also indicated good momentum in deal pipeline but remained cautious on its conversion due to COVID-19 impact and macro uncertainty

* Notably, even Indian companies witnessed strong deal activity during the quarter. Large deal signings of Infosys in this quarter were the highest that the company ever had. HCLT indicated that Sep’20 TCV was 35% higher QoQ and similar YoY.

* Further, deal pipeline in most companies has gone back to pre-COVID levels. HCLT announced that their 2Q pipeline was at an all-time high whereas in the case of LTI it was higher by 22% YoY.

 

Expect macro uncertainty to continue; Prefer INFO, HCLT, LTI, PSYS

* We continue to prefer Infosys and HCLT among the large-caps and LTI and PSYS among the Tier-II, as we factor in continued demand recovery. We see these companies as among the key beneficiaries of growth rebound and see the current valuation as reasonable.

* Moreover, recent commentary on Indian IT and even client enterprises offers us some comfort on the new business wins, ramp-ups, supply-side aspects, cost optimization, and margin management capabilities of these companies.

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