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Nirmal Bang Report
Cognizant's organic revenue guidance post Q3 2023 for 2023 has been cut at the midpoint. The Q4 2023 revenue guidance has come in a bit weaker than anticipated and bakes in a 2%-4% QoQ decline in USD terms. Cognizant Technology talked of incremental discretionary spend weakness. banking, financial services continues to be the key vertical under pressure.
Much of the demand related commentary seems to be pointing to a ‘slower for longer' situation that we had talked about when we cut our FY25 estimates through our recent report. Cognizant Technology stated that-
uncertainty is higher now compared to the past nine months,
while cost take out deals are being won, these are of longer tenure leading to duration of such deals increasing by 50%,
the ‘pricing to win' and ‘deliver to margins' phenomenon points to high competitive intensity in the market for large deals,
the ‘pass through element' as %age of revenue has increased materially indicating pressure on vendors to bend to needs of clients – not good news for margins for the entire sector. More and more vendors seem to be embracing this.
While trailing twelve months total contract value is up 16% it is only up 9% YoY in Q3 2023, it won fewer 100 millon plus deals (only three in Q3 compared to five deals in Q2 and four in Q1).
We believe Cognizant Technology under Ravi's leadership is trying to claw back market share. This we believe is bad news for its Indian listed peers who benefited from its weak performance over the last many years.
The ability to take on large deals with larger pass throughs and yet deliver margin expansion indicates-
the very low level of current margins,
the success of the internal delivery transformation within Cognizant Technology which seems to be generating higher than expected benefits some of which is being given back to clients.
We remain ‘underweight' the Indian information technology services sector, especially the tier-II. We continue to believe that the worst on the macro front is ahead of us and not behind us though we have been surprised by the resilience of the U.S economy.
Unlike the consensus view that there will be a sharp recovery in revenue in FY25 implicitly backed by a ‘no landing' view, we believe growth will disappoint. We also believe consensus view on margin expansion in FY25 is optimistic.
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