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Cognizant - Uncertainty persists - 1QCY20 Result Review - HDFC Securities

Posted On: 2020-05-12 17:44:28

Cognizant (CTSH) reported revenue of USD 4.2bn in 1Q, +3.5% YoY CC (-0.5% impact on exit of content-related services in CMT vertical) and had withdrawn its CY20 guidance earlier. BFSI grew +1.8% YoY CC impacted by continued softness in large US/UK BFS, offset by large deal/acquisition in Continental Europe and relative strength in regional US banks. COVID-19 impact on performance was aggravated by ransomware incident and is likely to have a deeper impact in 2Q.

Read-across for the sector include (1) Higher share of G-2000 accounts, vendor consolidation opportunities and projects with short-term paybacks (momentum in Salesforce/Workday projects) to offset the near term impact of delay in discretionary spend and volume/pricing cuts, (2) Secular trends in cloud migration and core transformation to accelerate post normalisation of economic environment (CTSH expects slow transition to normalcy only by 1QCY21), (3) Several cost control measures to be adopted within the pool of sub-contracting & variable pay, lateral hires, T&E, events & marketing and involuntary attrition, and (4) Investments to strengthen the security framework & protocols to accelerate in light of cybersecurity threats such as ransomware, especially in the current service delivery scenario. We prefer HCLT, INFY and LTI from our coverage universe.

Slow recovery: COVID-19 is expected to negatively impact demand and fulfillment (supply impact aggravated by ransomware incident) for CTSH. Heightened COVID-19 impact seen in Travel & hospitality, Retail, Auto, Energy, and Media & entertainment (~20% of rev). Enterprise clients' focus is on critical systems and discretionary spend is getting deferred, CTSH expects slow transition back to normalcy, only by 1QCY21.

Secular spend trends to accelerate post normalcy: COVID-19 impact will lead to accelerated digital investments with secular trends in cloud migration and core systems modernisation. CTSH's G-2000 portfolio, vendor consolidation opportunities and projects with short-term payback insulate the company from enterprise risk, despite the overarching headwinds from economic slowdown.

Source: Equity Bulls

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