Cognizant cuts guidance again, market share loss continues: IIFL Capital Services

4 Nov 2022 , 11:47 AM

Bookings in Q3 fell 2% year-on-year, with book-to-bill also declining to 1.0x, even though TTM ratio is still at 1.2x. CTSH lowered CY22 revenue growth guidance, yet again, to ~7% constant currency (cc) year-on-year (from 8.5-9.5%), mainly owing to company-specific fulfillment challenges compounded by the impact of uncertain macro. CTSH’s focus on profitability was visible in its margin improvement by 94 basis points sequentially; it reiterated CY22 margin guidance of 15.6% (up 20 basis points year-on-year). CTSH’s total headcount was up 2.4% sequentially as attrition declined 200 basis points. Analysts at IIFL Capital Services believe continued supply constraints at CTSH highlight company-specific issues and could accelerate market-share gains for Indian IT.

Slowdown across verticals

BFSI declined 1.4% sequentially (up 1.6% cc year-on-year, partly impacted by sale of Samlink business), led by public sector in the UK and Insurance. Healthcare declined 0.2% sequentially (up 5.5% cc year-on-year). Products & Resources grew 0.7% sequentially (8.2% cc year-on-year), while Comm., Media & Tech decreased sharply by 4% sequentially (10.4% cc year-on-year).

Bookings moderate; CY22 guidance cut

Bookings for the quarter were down 2% year-on-year – leading to TTM bookings at USD23.1 billion (up 6.5% year-on-year). CTSH’s TTM book-to-bill remained at 1.2X. CTSH indicated bookings in the quarter were below their expectations, due to continued challenges on the resource-fulfillment side (given the high attrition rate) and the impact of uncertain macro. CTSH indicated they are seeing longer sales cycles. CTSH cut its CY22 revenue growth outlook to 7% (from 8.5-9.5%) on tight supply and weak macro, while they remain optimistic on IT services market in the medium term.

Focus on profitability visible in margin improvement

CTSH’s GAAP operating margins stood at 16.4% (up 94 basis points sequentially), driven by balanced execution, INR depreciation and pricing initiatives. CTSH reiterated CY22 margin guidance of 15.6% (up 20 basis points). Voluntary attrition reduced by 200 basis points sequentially to 29%, after surging in Q2; CTSH expects it to see a sharper decline in Q4.

CTSH continues to lose market share to Indian IT

Analysts at IIFL Capital Services believe CTSH’s cut in CY22 revenue growth performance is driven by weaker execution and inability to curb attrition/accelerate hiring. Its CY22 revenue growth guidance of 7% implies 800 basis points lower growth versus Indian peers, based on IIFL Capital Services’ estimates. However, uncertain macro leading to longer sales cycles and higher-than-expected impact of furloughs – could impact near-term growth for Indian IT peers as well. Analysts at IIFL Capital Services continue to prefer stocks with better growth-adjusted valuations in large caps (Infosys) and mid-caps (Persistent/Mindtree). Underperformance in IT stocks YTD (down 21% versus NIFTY 4%) offers decent entry point, to own some of these healthy-growth stories from a long-term perspective, in the view of analysts at IIFL Capital Services.