Cognizant Q1 results: Key takeaways for TCS, Infosys, HCL Tech, Wipro & other IT firms

Cognizant Technology Solution post its recent March quarter earnings (Q1) said its market share loss is being arrested, as it stuck to its guidance of minus 2 per cent to 2 per cent in constant currency (CC) terms YoY revenue growth, with 100 basis points of inorganic contribution. The IT major left its revenue growth guidance range wide at 400 bass points, which it said would narrow in 3 months’ time.

"Incrementally we do not think Cognizant’s (CTS) 1QCY2024 results and the commentary following it add very much to our understanding of where demand is for the Indian IT services players now that March 2024 results are broadly done for the latter players," Nirmal Bang said.

When Cognizant first gave its 2024 guidance three months ago, the read through from it for the Tier-1 Indian peers including Tata Consultancy Services, Infosys, HCL Technologies, Wipro and Tech Mahindra, was that one should expect 5-7 per cent dollar revenue growth for FY25.

That, Nirmal Bang said, has indeed played out in the guidance and commentaries of the Indian players post the 4QFY24 results. That said, the  current quarter commentary of CTS does not add incrementally to that demand picture.

While Cognizant won eight large deals of over $100 million in the March quarter against four in the year-ago quarter, the TCV (total contract value) in the quarter was down 6 per cent on a YoY basis and the trailing twelve month TCV was up just 1 per cent YoY (down 1.5 per cent sequentially).

CTS indicated that the smaller deals between $0-20 million in size were very few in the market and probably not there in as many numbers as they were in the base quarter YoY.

"This induces uncertainty on any revenue pick up in 2HCY2023," Nirmal Bang said.

To deliver at the higher end of the guidance, there must be some pick up in discretionary spending and extra business should come through from clients where it is executing well on large deals, Nirmal Bang said. Besides, 30-40bps from incremental M&A and large rebadging type of deals are required where there is a lot of volume, it said.

"We reiterate our 24 month old ‘underweight’ call on the Indian IT Services sector as we believe we are in a ‘slower for longer’ environment," it said.

Nirmal Bang said valuations for most Indian IT stocks in its coverage universe are expensive in relation to their 5-year or 10-year histories and it sees no material upside to FY25/FY26 earnings for its coverage in the next 12 months.

"We believe that starting valuations are expensive and can at best deliver mid to high single-digit total stock returns (including capital return to shareholders) for TCS/Infosys, as we believe that structural revenue/earnings growth is being overestimated by the Street," it said.