Deal wins strong, growth to be H2 weighted: IIFL Capital Services

4 May 2023 , 10:31 AM

Bookings in Q1 increased 28% YoY taking TTM bookings to USD25.6 billion (+9% YoY), implying a book-to-bill of 1.3x. CTSH highlighted its progress on the three strategic priorities – i) becoming an employer of choice – easier career progression, focus on up-skilling; ii) strengthening ability to win large deals –green shoots visible in Q1 deal wins and pipeline; and iii) enhancing operating discipline – initiated NextGen program to simplify operating model and optimize corporate costs. CTSH guided for CY23 revenue growth to be -1% to +1% cc YoY and for Q2 to be -1% to 0% cc QoQ, due to softer discretionary spends. Operating margins for the quarter came in at 14.6% (-40 basis points YoY), primarily due to higher compensation costs.

Broad based slowdown across verticals

BFSI declined 0.3% QoQ (-1.4% cc YoY, with management indicating that the company specific challenges in the sector are largely behind but they are seeing softer discretionary spend by clients and slower decision making due to the macro headwinds. Healthcare grew 0.5% QoQ (+3.5% cc YoY). Products & Resources declined 2.6% QoQ (1.4% cc YoY) while Comm, Media & Tech grew 0.1% QoQ (3.9% cc YoY).

Healthy acceleration in bookings

Bookings for the quarter increased 28% YoY, including several large deals (30% of TCV) and a healthy mix of new and expansion work. TTM bookings came in at USD25.6 billion (+9.4% YoY), implying its TTM book-to-bill remained at 1.3X. CTSH indicated that they are seeing an uptick in their large deal pipeline. CTSH guided for CY23 revenue growth to be -1% to +1% cc YoY and Q2 revenue growth to be -1% to 0% cc YoY.

Margins improve sequentially

CTSH’s GAAP operating margins stood at 14.6% (-40ps YoY/+40bps QoQ), as gross margin pressure from increased compensation costs was partially offset by tailwinds from FX, lower SG&A spends and benefits from pricing actions. Voluntary attrition reduced further by 2pp QoQ to 17%. CTSH expects CY23 operating margins to be in the range of 14.2%-14.7%.

Macro uncertainty impacting near-term growth

Analysts at IIFL Capital Services believe CTSH’s muted Q2 guidance is a reflection of the near-term macro challenges and lower discretionary spending and corroborates with the commentary from the managements of Indian IT service companies. They believe that with the new management and a refreshed strategy, CTSH can pose competitive challenges to Indian IT but it may take time to culminate. Initial signs of green shoots from the refreshed strategy under the new management are visible in terms of large deal wins and strong pipeline. However, in the near-term analysts at IIFL Capital Services believe Indian IT peers will continue to gain market share over CTSH, as reflected in its CY23 guidance of -1% to +1% cc YoY growth. Analysts at IIFL Capital Services recommend staying selective in picking stocks given the macro uncertainties. They continue to prefer stocks with better growth visibility in large caps (INFO/TCS) and midcaps (PSYS/CYL).