Ship under repair!

3 Feb 2023 , 10:57 AM

Bookings in Q4 increased 12% YoY taking TTM bookings to USD24.1 billion (+4% YoY), implying a book-to-bill of 1.2x. Recently appointed CEO, Ravi Kumar laid out three strategic priorities – i) becoming an employer of choice; ii) strengthening ability to win large deals; and iii) enhancing operating discipline. 

CTSH did not give CY23 guidance at this point but indicated that growth will be below its multi-year goal of 8-11% YoY revenue growth, given its weak bookings and macro uncertainty. For Q1CY23, it expects revenue growth to be -1% to 0% cc QoQ. Operating margins for the quarter came in at 14.2% (-110bps) were impacted by impairment of capitalized costs related to a Health Sciences customer. CTSH’s total headcount was up 1.7% QoQ as voluntary quarterly annualized attrition declined by 10pp to 19%.

BFSI continues to drag growth

BFSI declined 2.6% QoQ (-1.4% cc YoY, partly impacted by sale of Samlink business) as weakness in Banking and Financial Service was partly offset by growth in public sector in the UK and insurance. Healthcare grew 1.5% QoQ (+5.4% cc YoY). Products & Resources was flat QoQ (5.4% cc YoY) while Comm, Media & Tech grew 0.1% QoQ (9.3% cc YoY).

Weak bookings to impact CY23 growth

Bookings for the quarter increased 12% YoY, primarily driven by the renewal of an USD1 billion 10-year deal with CoreLogic. TTM bookings came in at USD24.1bn (+4.3% YoY), implying its TTM book-to-bill remained at 1.2X. CTSH indicated that bookings in the quarter remain muted, which is likely to impact near-term growth. CTSH did not give CY23 guidance at this point but highlighted that the growth is likely to be below its multi-year goal of 8-11%.

Focus on profitability visible in margin improvement

CTSH’s GAAP operating margins stood at 14.2% (-110ps QoQ), as headwinds from increased compensation cost and one off impairment cost with a Health Sciences client (-120bps) were partially offset by INR depreciation (100bps) and SG&A leverage. Voluntary attrition reduced by 10pp QoQ to 19%, which helped CTSH reduce sub-contractor usage.

Refreshed strategy to take time to culminate

Analysts at IIFL Capital Services believe deferring the annual guidance by CTSH indicates the near term macro uncertainty and challenges in quickly turning around a large ship like CTSH. 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. However, sharp drop in attrition, some traction in deal wins and focus on the right issues are all signs in the right direction. In the near term, analysts at IIFL Capital Services do not see CTSH results as a strong read across for Indian IT and expect Indian IT peers to continue to outgrow CTSH. While valuations are relatively full, they recommend staying selective in picking stocks. Analysts at IIFL Capital Services continue to prefer stocks with better growth visibility in large caps (INFO/TCS) and mid-caps (PSYS/LTIM).