>INDIAN IT SERVICES (CITI)

Cognizant Q2: Another “Beat and Raise” Quarter

■ Good Q2; CY09 guidance raised — CTSH reported $777m in revenues (+4% qoq) ahead of consensus at $764m. Q3 revenue guidance of at least $800m (~3% qoq) is also ahead of Street expectations ($783m). CTSH also increased its CY09 revenue guidance to “at least” 11.5% yoy growth (earlier “at least” 10%).

■ "Full quarter of stable budgets" — CTSH indicated that this was the first full quarter where IT budgets were stable; clients started spending as per plans. Application development increased ~4% qoq – inline with application management. The company indicated that a large part of the pipeline was cost containment kind of work and was cautious on development in the near term.

■ BFSI stable, Healthcare continues to do well — BFSI stabilized – in core banking, some growth in America/Continental Europe was offset by decline in a couple of UK banks. Healthcare continues to be a growth driver – increased ~8% qoq and is now ~26% of revenues. Retail and logistics had another good quarter (~8% qoq).

■ Pricing stabilizing — On pricing, management was confident that the downward trend was largely over; pricing should be stable sequentially over the rest of CY09. Management indicated that this would be ~3-5% decline yoy; however, most of that has already happened in 1H.

■ How does it compare to outlook given by Indian peers — (1) Stable demand/IT budgets. (2) Better pipeline. (3) Stability in BFSI. (4) Weakness in technology/manufacturing – comments similar to Indian peers. On pricing, Infosys/TCS had indicated that they would not rule out some customers renegotiating prices again – CTSH was confident about future stability.

■ Earnings upgrades the key to further upside – prefer Infosys/TCS — As highlighted post earnings season for Indian IT, business seems to have stabilized – the big question is the pace of recovery. However, Indian IT stocks are already close to pre-slowdown multiples. Any further up move in stocks would require meaningful EPS upgrades/positive news. We continue to prefer Infosys/TCS.

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