CTSH - Unprecedented revenue 'surge', valuations finally catches with Indian peers - Elara Capital

Cognizant – Unrated – (Bloomberg Code: CTSH US, CMP: USD 60.62, Market Cap: USD18.15bn)

June quarter results: Unprecedented revenue 'surge'; valuations have finally caught up with Indian peers

CTSH has come up with a 15.2% qoq (against consensus estimates of a 6.2% qoq) top-line growth. Growth was led by broad based traction in all areas of financial services. The bunched up revenue in the quarter seems to have come from M&A related transformation projects particularly in the BFSI verticals. While CTSH has typically been ahead on volume growth relative to the Indian vendors because of its well entrenched front-end and consulting practices, this quarter's beat is ahead of the regular volume outperformance.

Guidance for CY10 increased from yoy growth of 25% to 36% - 'beat and raise' routine to continue: While the hike in guidance is more to do with the guidance beat in this quarter, it implies a revenue guidance of 3.7% qoq in Q4 (taking the Q3 guidance of 6.3% qoq into account). We think this is largely in-line with the tone and tenor of management commentary and guidance by Tier-1 Indian vendors. We however, believe that CTSH will easily beat its guidance for Q3 and raise guidance for Q4.

Opportunities for Indian vendors: CTSH has also pointed out that its strong healthcare consulting teams are allowing it to get downstream projects. Deadlines for ICD conversion and HIPAA 5010 are giving the Company opportunities to get into the provider segment. CTSH has engaged 5 clients from these regulatory changes and 3 of them have signed follow-on programs. As we had pointed out post the Infosys Analyst Day, this opportunity is going to get meaningfully significant as we approach the deadline dates of 2012 and 2013.

Valuation and result impact on IT stocks: CTSH is currently valued at 23.28x CY11 consensus earnings. Valuations on PEG basis for CY11 stands at 1.17x. Even if we take into account the faster growth profile for CTSH, valuations look to be in-line with that of Tier-1 Indian peers like Infosys.

Source : Equity Bulls

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