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Cognizant board has to exercise its fiduciary duty, assess what is going on: Moshe Katri

In an interview with Moneycontrol, leading IT analyst Moshe Katri drew parallels between Cognizant and its Indian rivals such as Infosys and Wipro, where founders tweaked leadership till they found the right candidate for the top job.

August 08, 2022 / 09:31 AM IST
Moshe Katri, Managing Director of Equity research at Wedbush Securities

Moshe Katri, Managing Director of Equity research at Wedbush Securities

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Moshe Katri, who has been covering IT services and payments for more than two decades believes that Cognizant’s relative underperformance vis-a-vis its peers warrants action from the board. He contrasted its fortunes with Indian rivals such as Infosys and Wipro, where the founders took an active role in tweaking leadership at the right time. Katri currently serves as Managing Director of Equity research at Wedbush Securities. Katri, despite his concerns, has an Outperform rating on Cognizant, as he believes it is a very valuable, underutilised asset that can be revitalised under the right circumstances.

For the longest time, Cognizant was the barometer of growth for the Indian IT industry, but in the last three years it’s been besieged by a host of issues, losing market share in key accounts, even as attrition has been soaring, at the executive and junior levels. A majority of the Nasdaq-listed company’s employees are based in India. Cognizant recently pared its revenue growth guidance for the full year to 8.5-9.5 percent, signalling tough times ahead.

Moneycontrol reached out to Cognizant to seek its responses on some of Katri’s concerns. We have added excerpts at the end of some of his answers.

Edited excerpts:

If you look at the April-June quarter, it's been a mixed quarter. We've seen the likes of Accenture, Infosys, and even Capgemini being very optimistic. But we have seen caution creeping in if you look at the likes of TCS. So, do you think the multi-year technology spending cycle will continue or will recessionary fears play on the minds of clients? What’s your broad sense of the IT sector?


This quarter has been a mixed bag, as you suggested. On one hand, you're seeing some pockets of weakness, especially given the macro volatility out there, which is not unusual. And then on the other hand, you also have some forex headwinds that have been impacting the numbers as well.

And obviously, you cannot ignore the fact that wage inflation has also been impacted margins for the industry during the past 12 to 18 months. On the flip side of it, you've seen the demand, remain relatively resilient. And probably the next key point is going to be the budget cycle for calendar 2023. And this is probably where we will see some of that weakness that you're kind of talking about. Probably a bit stronger.

Historically, macro volatility is correlated with the propensity to spend, or lack of propensity to spend, if you will, and we may see that weakness heading into calendar 2023. But again, for now, I would say that this is probably one of the best spending environments since the Y2K era for this industry. And it's been going on for the past two, three years.

What do you think is driving underperformance as far as Cognizant is concerned? Be it winning large deals or high attrition. Even their price earnings ratio- I think it's trading at a multiple of 15, whereas if you look at some of their rivals, they're trading anywhere between 20 to 45. What do you think is the fundamental issue here? Because it used to be the barometer of industry growth, even three or four years ago.

Yes. We actually published a note on Cognizant(2 weeks ago) listing some of these challenges that you mentioned, anywhere from systematic attrition at the executive level, attrition kind of now expanding or has been expanding to the bench level, that's probably one of the most critical things that have to do with a people business.

If you don't have the right bench on the executive side to run the operation, or manage it or strategically decide where you want to take it to, or if you don't have the right people to be able to kind of process the business-it is just really difficult to operate in IT services in general. If you don't have enough people to be able to compete for deals, you will be losing share. So these are some of the probably more critical challenges a Cognizant has had.

And then on top of that, as we suggested, the decision to pretty much shy away from large deals, just because they are so called risky, probably costs you 500 basis points of growth on an annual basis. You know, maybe the legacy large deals were risky or riskier. Today, a lot of those large deals carry a digital component, carry a BPO component. And if you have the right people to scope, price and execute these deals, you can probably moderate or maybe shield yourself from some of those risks that you're talking about.

But Cognizant has not been in large deal discussions for many, many years, especially since this new leadership team came on board. And in our view, this is a mistake. And that goes back to what you were saying which is, Cognizant went from being the barometer in terms of growth for the space to pretty much going to the other extreme.

(Reacting to this, a Cognizant spokesperson said “We have always pursued large deals and will continue to do so in line with our strategy. In fact, we announced a large deal with AXA, a well-known insurance provider in the UK and Ireland.” The company further said it will target large deals that make sense from a country and industry perspective, adding that it has intentionally pushed on scaling its digital business and is not pushing for large, structure captive takeover deals)

So what do you think has really changed? Because when you compare it with what happened after the leadership changes at Infosys, where Salil Parekh has turned around the company, or even Wipro where there is momentum under Thierry Delaporte. We're not seeing that in Cognizant. It's been three years since Brian Humphries took charge as CEO?

Infosys was very lucky, or is very lucky, because they have a host of founders that still care a lot about the company. And you've seen these guys really tweak and tweak the management team until they found the right leader to be able to run the business, somebody who is trying to look for consensus, somebody that tried to really unite the operation and did exceptionally well, at Infosys.

Wipro is also went through tweaking, and it seems that they did find the right leader, ironically, they're both coming from Capgemini.

I think it's time for Cognizant board to maybe go back and kind of assess or reassess what is going on at the company. It just feels that this company is there at this point without any sort of sponsorship or authority or some sort of an authoritative body to kind of examine and assess or reassess the performance of this leadership. It's really difficult to be a passive board in this environment, when everybody's kind of looking at you under the microscope.

(Reacting to this a Cognizant spokesperson said the company is successfully executing on its strategy to accelerate digital, scale internationally, increase its relevance to clients and reposition its brand)

When you say the board needs to reassess, are you hinting at a leadership change? And who is going to bell the cat? There is no founder or promoter here who has skin in the game. It’s a professionally managed board so to speak.

It has to come from the board, or it has to come from the investment community. When we published our note, we didn't really get too much pushback from investors in terms of some of the things that we highlighted in terms of challenges and things that need to change in the company.

Are investors running out of patience, as far as Cognizant is concerned?

I would say not yet. Most of the people we talked to still remember the brand name and the track record of this company. And I think you have a very valuable, underutilized asset at this point.

How has Cognizant’s challenges helped its Indian peers, in terms of taking away market share or taking away executives?

When Infosys and Wipro had similar issues, you've seen the same thing. You've seen executive departures, you've seen leadership changes, and you’ve seen market share losses. And I think this is kind of what's going on a Cognizant. You don't have the right talent, you're losing share.

Their bookings were down during the quarter sequentially. And so yeah, when you have these issues, you will see both executive departures and share losses. But again, the good news is that this can be stopped under the right circumstances, all this can change.

When you say right circumstances, you mean, the board has to really look at it in a more serious fashion?

The board has to exercise its fiduciary duty, and assess and reassess some of these things that we're talking about.

(Reacting to this, a Cognizant spokesperson said, “We have full confidence in our strategy and leadership team. Our Board fully supports our strategic direction and our management team)

One thing that also stood out for me when I looked at IT earnings across companies this quarter, is the total contract value. It seems to have come down for players. Do you think this is a one quarter trend? Or are we entering a new normal, where clients are not going to spend?

It's difficult to track total contract value on a quarterly basis, just because these deals tend to be lumpy. So you may have one or two quarters every year, where you're going to have some large deals that you're winning. So that's why you have to look at these on a trailing 12 month basis.

Based on that, the deal flow looks pretty healthy. Having said that, if you talked to people like ISG, they are telling you that the deal flow, or maybe the decision cycles are kind of getting a bit longer because of the macro. So in general can look at on a quarterly basis, but I wouldn't be surprised if you're going to see some slowdown heading down the road.
Chandra R Srikanth is Editor- Tech, Startups, and New Economy
first published: Aug 8, 2022 08:39 am
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