Cognizant: A year of closing gaps!

5 Apr 2024 , 11:14 AM

Analysts of IIFL Capital Services analysed Cognizant’s (CTSH’s) 10-K filing for 2023 and found the following interesting observations: 1) Incremental revenues muted, with BFSI showing the greatest degree of decline; resulting in an overall decline in revenues. 2) In the past 3 years, BFSI has seen a decline in outsourcing revenues, indicating continuous pricing pressures. North America has underwhelmed across verticals, while Europe has been the key growth driver. 3) CTSH’s book-to-bill of 1.4x indicates rising deal size and growth potential in the medium term, even as workforce declined by 7,600 in CY23, rationalising its facilities space by 4mn sq.ft or ~14% of capacity. 4) Of the US$1.1bn M&A-related goodwill recognised during CY21-23, P&R has seen the maximum addition (40%), followed by CMT (32%). 5) BFSI, CMT and P&R have seen margin erosion of 120-500bps over 2021-23, while Health Sciences is the only vertical to see a 50bps expansion. 6) Most of the senior management has been replaced by outsiders in the past three years, including a new CEO and CFO. 7) CTSH made two acquisitions in 2023, which may have immaterial contribution to CY24 growth, even as M&A added 110bps in CY23.

A year of closing gaps:

In 2023, CTSH’s revenue declined by 0.4%, majorly due to a decline in BFSI revenues. However, the growth gap with Indian IT peers reduced in BFSI, North America and Europe. Analysts of IIFL Capital Services believe a stable CTSH can pose threat to Indian IT peers’ market share in future. Acquisitions contributed 110bps to the growth in CY23.

Margins decline on supply pressures and restructuring costs:

Overall margins showed negative impact of 140bps in CY23 due to increased compensation costs, due to two merit increase cycles for the employees; partially offset by INR depreciation, savings generated from the NextGen program and improvement in the profitability of a large contract with a Health Sciences client in 2023. Restructuring costs related to NextGen program impacted margins by 120bps and may continue in CY24 as well.

Other notables:

Headcount in India was lower by ~4,500 employees, while that in Europe and North America reduced by ~2,600 and ~600 respectively. Other locations saw flat hiring (~100). CTSH bought back US$1.1bn worth of shares in CY23 (50% of PAT) and announced a 28% dividend payout. It will look to maintain a 50% total payout in future.