Cognizant - CY13 guidance indicates soft demand outlook - Ambit

In 4QCY12, Cognizant's revenues increased by 3% QoQ to US$1.95bn. CY12 revenues increased by 20% YoY, in line with the company's revised guidance of at least 20% YoY growth (which was lowered from the initial guidance of 23% in 1QCY12). The management guided for CY13 revenue of at least US$8.6bn, implying YoY growth of at least 17%. The CY13 revenue guidance includes US$90mn of inorganic revenue, implying an organic growth guidance of 15.8% YoY. For 1QCY13 (quarter-ending March 2013), the company gave a revenue growth guidance of 2.7% QoQ (organic growth of 2.1%).

Implications for IT companies under our coverage: Cognizant's CY13 organic revenue growth guidance of 15.8% is in line with the 15.9% YoY revenue growth target set in early December for the top management's eligibility to receive 100% stock units. The management highlighted two factors behind the weaker guidance: (1) expectation of a weak 2013 for the pharmaceutical business, and (b) cautious assumptions for discretionary spending. We believe that this sets the upper limit for the industry's growth range, with Infosys and Wipro at the lower end of the range and with TCS and HCL Tech in the middle of the range. As we have highlighted earlier, the industry has not come out of the woods yet and concerns over discretionary spending persist. We maintain our cautious outlook on demand recovery in FY14 for Indian IT service firms.

Key takeaways

- Broad-based growth across key verticals: Revenues in the Financial services vertical increased by 3.4% QoQ, whilst the Healthcare vertical rebounded with 3.5% QoQ growth, after declining by 0.2% QoQ in 3QCY12. The Manufacturing vertical expanded by 3.1%, after a strong 10.6% QoQ growth in 3QCY12.

- Healthcare to remain under pressure in CY13: The management highlighted that initial discussions with the clients indicate a weak year for the pharmaceutical business. The company expects strong growth in CY14 and CY15. The management suggested that the rebound in revenue in 4QCY12 in Healthcare should not be seen as a sign of recovery in the vertical.

- Discretionary spending struggling with lumpy demand: Management highlighted that although customers have begun to spend on discretionary projects the nature of demand remains unpredictable and lumpy. Cognizant expects growth in discretionary services to remain lighter than that in nondiscretionary services and ruled out possibility of upside risks on discretionary spending and has baked in some discretionary spending into CY13 revenue guidance.

- European market opening up for non-discretionary spending: The management highlighted that the continental European market is opening up for Application outsourcing and Application maintenance work. However, decision-making uncertainties continue to persist. The management expects the continental Europe market to expand at a faster growth rate than the company average.

- Element of pent-up demand in Banking: The management alluded to an element of pent-up demand in Banking within its larger BFSI vertical. Management highlighted that spending levels have turned around since the middle of 2012, however this improvement has been baked into the unremarkable CY13 guidance.

Source : Equity Bulls

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