Cognizant Technology Solutions: Accelerated Growth In 2022; Multiple Expansion Possible: Nirmal Bang

Nirmal Bang Report

Cognizant Technology Solutions gave a 3-year (2021-2024) guidance: revenue CAGR of 8-11%, cumulative 3-year EBIT margin improvement of ~110bps over 15.4% that it will clock in 2021, FCF being 100% of net income and allocation of 50% of FCF to M&A compared to 28% TTM, implying lower capital return to shareholders.

With an average ~200bps inorganic part indicated, organic CAGR in CC terms will be 6-9% during 2021-2024.

Specifically on 2022, it was indicated that growth would be at the upper end of the guided range while margin improvement would be at the lower end.

Assuming inorganic contribution of 200bps, this implies acceleration in growth to 9% (in organic CC terms) in 2022 from 6.5% in 2021.

While CTS will likely underperform Tier-1 India heritage peers in terms of growth by ~800bps in 2021, we believe that the gap will narrow in 2022 to ~300bps if CTS delivers on its guidance and Indian companies slow down to low teen organic growth built into sell-side estimates for FY23.

We believe that the margin differential will continue to be fairly high at 500-1000bps between CTS and its Tier-1 Indian peers even in the years ahead.

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