Cognizant board bound to notice underperformance, execution challenges: Wedbush

The board of IT services provider Cognizant is “bound” to take note of its underperformance and act upon these issues, “leading to leadership changes at the helm,” US-based wealth management and investment banking services firm Wedbush has said.

Wedbush based its assessment on Cognizant's loss of senior executives, ‘inability’ to hire leaders from technology companies, the decision to stay away from large deals, and ‘relative underperformance’ compared to tier I offshore and global peers.

“There is an inevitable, imminent urgency of addressing these issues, especially as following numerous executive departures, the floodgates are now opened to include the company's consulting bench, another indicator of a not-so-friendly working environment,” Moshe Katri, managing director - equity research, at Wedbush, wrote in a note dated July 29.

Katri, according to Wedbush's website, has been tracking IT services and payments for two decades.

ET has seen a copy of the note.

Cognizant told ET that the assertions described in Wedbush’s report were “speculations at best.”

The report neglected how Cognizant was executing on its strategy, and several large deals - Zurich Insurance in Germany, National Insurance Company in India, and AXA, UK & Ireland – it had announced recently, the company said.

“We have an industry-leading book-to-bill ratio of 1.2x, reinforcing our revenue growth expectations. We have expanded margins by 30 basis points year-over-year, and 50 bps sequential improvement, at a time when many of our peers are experiencing margin decline. Additionally, we returned more than $1 billion to shareholders through the first half of the year,” Cognizant said.

Wedbush did not respond to ET’s email seeking comment.

Cognizant's attrition rate – as of its fiscal second quarter ended June 30 - remains high at 36% (including layoffs).

“We are surprised with the increase as other IT companies have reported decline on an annualized basis in the quarter. Headcount addition of 900 employees was muted taking overall headcount to 341,000,” Kotak Institutional Securities wrote about Cognizant's attrition levels following its second quarter results.

On talent retention, Cognizant said it had “promoted and recruited several senior executives that bring deep experience, right skills, and expertise to continue to drive our transformation and unlock value for our shareholders.”

It said the company was driving strong growth and maintaining strong positions in key business areas.

“We are investing in our global delivery network, people and capabilities to ensure we are positioned for sustained success, it said, adding that the board “fully supports our strategic direction and our management team.”

Cognizant's revenue grew 9.5% in constant currency terms, while net profit rose 12.7% in the second quarter.

In comparison, TCS grew revenue 15.5%, while Infosys and Wipro recorded 21.4% and 17.2% growth, respectively.

Cognizant, nevertheless, managed to increase operating margins by 30 basis points to 15.5%, but cut topline forecast for a second straight quarter even as Indian peers maintained their forecasts. Infosys raised its guidance on a strong demand pipeline.

In the note, Wedbush has given an ‘Outperform’ rating for Cognizant, with a 12-month price target of $95 apiece, against its current level of $68.8 per share.