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Cognizant: Growth lags Indian IT yet again

Cognizant posted revenue of USD4.7bn in Q3FY21, up 11.8% YoY (11% in cc) in line with consensus forecast. Adjusted operating margin for the quarter contracted 10bps YoY (to 15.8%), with cost of increased hiring somewhat offset by cost discipline elsewhere. GAAP EPS at USD1.03, up 60.9% YoY, is also in line with analysts’ expectations.

Management highlighted it remains bullish on macro-demand environment as well as Cognizant’s growing momentum in digital. Voluntary attrition is highest at mid-to-junior levels of the pyramid, primarily in India. Cognizant anticipates attrition to remain elevated in Q4FY21. This, we believe, would affect its revenue growth. Cognizant is not rated.

Broad-based growth

Revenue growth was driven by Products & Resources, up 18.1% YoY (in cc) driven by double-digit growth in manufacturing, logistics, energy and utilities, Communications, Media & Technology up 19.1% YoY (in CC) of which approximately 500bps of growth was attributable to recent acquisitions led by the technology business, Healthcare, up 9.8% YoY (in cc), was driven by a strong showing in both healthcare and life sciences businesses. Financial services grew 4.3% YoY (in cc).

Guidance revised

Adjusted operating margin contracted approximately 10bps, with the cost of increased hiring offset by cost discipline elsewhere. Q3 voluntary attrition reached 33% on an annualized basis or 24% on a TTM basis. Continued elevated attrition resulted in higher sub-contractors, recruiting and other delivery costs. Digital revenue shot up 18% YoY and accounted for 44% of revenue.

Management has guided for USD4.75–4.9bn for Q4, assuming a favourable 20bps impact and inorganic contribution of approximately 310bps. At midpoint, FY21 revenue guidance comes at USD18.5bn, implying an uptick of 11.1% YoY and 9.8% YoY in cc. In the fourth quarter, It expects to make offers to 45,000 new graduates in India for on-boarding in 2022.

Outlook

Cognizant and Capgemini continue to lose their overall market shares, which will directly benefit Indian counterparts. Management highlighted that hyperscalars are omnipresent and extremely powerful, and the platform is scalable into various technologies such as cloud migration, which can be further used for data modernization, AI, machine learning, IoT, etc.

However, the company’s FY22 revenue guidance is significantly lower than key Indian IT companies, which are targeting mid-to-high double-digit revenue growth in FY22. Management also cautioned against elevated attrition, which would affect revenue growth and margins. To infer, Indian IT companies are gaining at the cost of Cognizant, which is trying to make a comeback. Cognizant is not rated.

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