Wednesday, February 9, 2011

Cognizant Result Review by PINC Research

Cognizant Result Review by PINC Research Revenues grew 7.7%QoQ, higher than other large Indian IT vendors. Pricing witnessed positive surprise, onsite and offshore pricing grew 1.5%QoQ and 2%QoQ respectively.
Strong revenue growth, stable operating margins: Cognizant reported revenue growth of 7.7%QoQ (45.2%YoY) to USD1,311mn for Q4CY10, outperforming its guidance of USD1,270mn. This was led by strong volume and a positive surprise in pricing. Net income surged 43.2%YoY to USD206mn (1.2%QoQ).
Broad based growth across verticals. BFSI vertical grew 6.6%QoQ (43.2% contribution to revenue) on the back of strong demand for regulatory and compliance work, healthcare vertical surged 11.9%QoQ (24.9% contribution) which witnessed traction in services like data warehousing and analytics. Manufacturing & retail grew 5.6%QoQ (18.6% contribution).
Pricing supports operating margin: The operating margin (non GAAP) remained flattish at 18.66%. Pricing improved in this quarter led by management's constant efforts for pricing negotiations. It is expected to improve further going forward. The management expects the operating margin (non GAAP) to be in the range of 19-20% for CY11.

Uptick in discretionary spend in US led by pent up demand; healthy client and employee addition: Application development grew 8%QoQ (64%YoY) and now contributes 50% of the revenues; led by pent up demand for discretionary IT spending. Cognizant added 61 new customers in Q4CY10 to take the active client list to 712. The total number of strategic clients was 166. The net additions in this quarter were 8,345 and total headcount is 104,000 employees at the end of Q4CY10.
Cognizant delivered industry leading growth in CY10 with 40%YoY revenue growth, double of their initial guidance of 20%YoY given at the end of Q4CY09. The revenue outlook for the next quarter is 3.8%QoQ higher than its peer Infosys' revenue growth guidance of 1-2%QoQ and in line with Wipro's revenue growth guidance of 3-5%QoQ. Cognizant has given a robust outlook of 26%YoY revenue growth for CY11 and also commented that they have built some conservatism in this guidance. The growth will be led by volume with expectation of few percentage points increase in pricing on YoY basis. The implied revenue CQGR from Q2CY11-Q4CY11 is 4.2%QoQ. We believe that the growth momentum is healthy and Cognizant will be able to easily outperform under the current macro conditions where fears of double-dip recession in the west have diminished and outsourcing has gained prominence.
Our assumption of 22-24%YoY volume growth seems achievable for the next fiscal for top tier IT companies. We remain positive on the large cap IT firms with a BUY recommendation on Infosys, TCS, HCL Tech and Wipro with a target price of Rs3,750, Rs1,350, Rs615 and Rs513, respectively.
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