TCS, Infosys, Wipro, HCL Tech, TechM: What Cognizant's Q3 results suggest for Indian IT firms

Cognizant, a peer for domestic IT firms, reported a soft third quarter, with revenue coming in within its guidance range at $4,897 million but was lower than consensus estimates of $4,909 million. The Cognizant management lowered its Calendar 2023 guidance to minus 0.7 per cent to flat in constant currency (CC) terms but bookings remained solid, rising 16.5 per cent YoY, with the trailing twelve month backlog healthy at 1.4 times book-to-bill. Analysts shared mixed views on following Cognizant's results.

"Cognizant reported strong TTM TCV of $26.9 billion with book to bill of 1.4 times. However, the duration of the deal has increased by 50 per cent compared to the prior period. Cognizant has lowered revenue guidance for FY24 to -0.7 per cent–0 per cent from -1 per cent–+1 per cent, due to macro uncertainty while it upgraded its margin guidance to the top end at 14.7 per cent," Nuvama Institutional Equities said.

Nuvama said Cognizant’s soft quarter and trimming of 2023 outlook reflects uncertainty in client discretionary spending. Its results were similar to large India IT Services companies where deal wins continued to be very strong while revenue growth remained soft, it said.

"However, we believe the lower revenue growth is temporary in nature, as the deal mix shifts from short tenure to long tenure. We believe strong deal wins would lead to higher growth in the medium to long term. All in all, we maintain our positive stance on the Indian IT services sector. We see a sustainable strong demand environment in the form of transformational and/or cost-takeout deals driving revenue growth over the next two–three years," it said.

Nirmal Bang Institutional Equities remained ‘underweight’ on the Indian IT Services sector, especially the Tier-2 players. It said the worst on the macro front is ahead, even as it is surprised by the resilience of the US 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," it said.

Nomura India said weak discretionary demand to weigh on near-term growth though large deal wins continued.

Nirmal Bang said Cognizant under CEP Ravi Kumar's leadership is trying to clawback market share.

This, it believes, 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 and the success of the internal delivery transformation within Cognizant which seems to be generating higher than expected benefits some of which is being given back to clients," Nirmal Bang said.

Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, Tech Mahindra Ltd and HCL Technologies Ltd reported a mixed set of Q2 results earlier this month.

Meanwhile, Kotak Institutional Equities noted that September was a weak quarter for the IT industry, though not entirely surprising. The results were important from the vantage point of getting cues for FY2025—on that aspect, the takeaways were mixed with mega-deal announcements providing visibility, offset by a weakening discretionary spending environment, it said.

"Thankfully, the cost management has received elevated focus, driving margin expansion and cushioning earnings against revenue headwinds. We believe that risk-reward is in balance in the sector and favourable in Infosys, HCL Tech and Cyient," it said.

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