IT giant Cognizant has appointed Ravi Kumar S as its CEO. The company’s outgoing CEO, Brian Humphries, will continue as an adviser until March 15, 2023 to facilitate a smooth transition. The company is facing two key challenges, and to some extent they are related to each other. First, weaker than-industry revenue growth due to market share loss and supply side challenges, particularly at onsite locations, and two, entrenched attrition in the organisation leading to an overall attrition much higher than the industry average. We have been noting that Cognizant needs to urgently address its attrition problem to avoid growth and margin slippages.
Ravi is an industry veteran with 20+ years of experience at Infosys, where he was a President and the global head of all service lines and digital sales. Ravi was also part of the localisation programme of Infosys in the US, where the company hired 25,000 locals and visa independent staff during the 2019-22 period. We think that Ravi’s prior experience in creating an employee pyramid and onsite development centres in the US could help Cognizant overcome its supply side challenges.
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The growth issue is a much more nuanced problem and needs a more thoughtful strategy, including a possible beefing up of the sales force. In previous situations of senior leadership changes in companies like Infosys and Wipro, we note the strategy often involved significant investments into sales and capabilities which yielded benefits with a lag of 1-2 years.
In the CTSH case, leadership change is happening in the backdrop of a weakening macro-economic environment with the slowing deal momentum leading to a possibly higher competition.
We expect management to share more details on the company’s likely refreshed strategy in Q4CY22 results call on Feb 2. Q4CY22 guidance changed modestly For Q4CY22F, Cognizant has revised its revenue guidance to $4.8 bn vs $4.72-4.77bn earlier. For CY22F, revenue guidance has been raised modestly to $19.4 bn, from $19.3bn earlier.
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On operating margin, however, CTSH has lowered guidance for CY22F to 15.3% vs 15.6% earlier due to a 30bp charge from the impairment of certain capitalised costs relating to a large volumebased contract with a Health Sciences customer . CTSH’s valuations are cheap at 12.6x CY23F EPS reflecting market concerns on growth underperformance and its industry-high attrition levels. We maintain Neutral with our TP of $60, set at 12x CY24F valuations. We prefer Infosys in the large-cap Indian IT services space.