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Cognizant Rating: Better than Expected

Cognizant (CTSH) reported better-than-expected Q1CY18 numbers —2.2% q-o-q revenue growth to $3.83 bn and 60bps q-o-q jump in operating margin to 20.3%. Key highlights: (i) with shift towards high-value digital services, digital sustained robust momentum (up 27% y-o-y) with superior margin than the company’s average; (ii) CTSH is capitalising on this trend with its Digitise, Internationalise and Localise strategy, akin to top Indian IT companies; (iii) CY18 USD revenue growth guidance at 8.4-10%, with 2.2-3.3% growth in Q2CY18; (iv) strong surge in markets outside US continues —key focus area; (v) while large banks continue to rationalise legacy spends, sustained uptick seen in digital services.

Management commentary was positive driven by higher proportion of digital revenue and visible recovery in key verticals, in line with our thesis. Considering the improving outlook, we maintain ‘BUY’ on Infosys, Tech Mahindra (TECHM) and HCL Technologies (HCLT).

Broad-based growth across industries

Products & resources posted strong growth (up 5.2% q-o-q) on traction in manufacturing and logistics, while retail vertical is recovering. With higher creation and curation of digital content, communications and media & technology posted strong growth across the board (up 3% q-o-q). Robust demand for digital offerings from financial services sustained and insurance posted double digit growth driven by large strategic deals. However, large banks continued to optimise legacy spends, pulling down growth (up 2.2% q-o-q). Despite high demand for digital services amongst payer clients, healthcare vertical fell 0.2% q-o-q.

Digital continues to steer growth; non-US market opportunity huge Digital revenue grew 27% in Q1CY18, accounting for 29% of revenue. Portfolio of digital services is also garnering higher margin than the company’s average. CTSH is focusing on expanding rapidly outside the US market (growth of 6.6% q-o-q) as it sees opportunities in improving economies and huge adoption of digital.

Outlook: Rapid shift to high-value digital services continues CTSH’s strategy of higher investment in digital and localisation is in line with Indian IT companies. Also, improving global economy and faster-than-expected digital adoption in some of the non-US markets are key growth drivers. We retain our positive view on the Indian IT sector and maintain ‘BUY’ on Infosys, TECHM & HCLT and ‘HOLD’ on TCS & Wipro. – Financial Express

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