Cognizant: A year of transition!

13 Mar 2023 , 10:17 AM

The key takeaways include:

• Incremental revenues healthy, excluding BFSI
• In past three years, BFSI has seen decline in outsourcing revenues, indicating continuous pricing pressures. North America has underwhelmed across verticals, while UK has been the key growth driver. 
• CTSH’s book-to-bill of 1.2x indicates growth potential in CY23, as the company hired 24,700 people in CY22 while rationalizing its facilities space by 1mn sq.ft. 
• Of the US$1.8 billion M&A-related goodwill recognized during CY20-22, Products & Resources has seen the maximum addition (37%), followed by CMT (28%). 
• BFSI and Healthcare have seen margin erosion of 226-361 basis points over 2017-22, while Products & Resources is the only vertical to see 135 basis points expansion.
• Most of the senior management has been replaced by outsiders in past three years, including a new CEO. 
• CTSH made two acquisitions in 2022, which may have immaterial contribution to CY23 growth, even as M&A added 100 basis points in CY22.
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A year of transition

In 2022, CTSH’s revenue growth was driven by clients’ continued adoption and integration of digital technologies as well as pricing improvements, but was negatively impacted by the challenges of attracting and retaining personnel and slowing demand through H2CY22. Acquisitions contributed 100 basis points to growth, while the sale of Samlink subsidiary negatively impacted by 60 basis points. The recently appointed CEO Ravi Kumar, laid out three strategic priorities: 

i) Becoming an employer of choice

ii) Strengthening ability to win large deals 

iii) Enhancing operating discipline

Margins witness stability despite supply-side challenges

Operating margins for BFSI declined 700 basis points in the five years till CY20, attributed to high pricing pressure; but improved by 340 basis points in CY21-22. Overall margins remained flat in CY22 as economies of scale, delivery efficiencies and INR depreciation were offset by higher compensation costs and 30 basis points impact, due to the impairment of costs related to a large contract.

Other notables

Headcount in India rose by 18,500, while that in Europe reduced by 5,600, suggesting increased offshoring. CTSH bought back US$1.4 billion worth of shares in CY22 (62% of PAT) and announced a 24% dividend payout. It will look to maintain a 50% total payout. Analysts at IIFL Capital Services believe a stable CTSH can pose threat to Indian IT peers’ market share in the future.