J.P. Morgan Securities upgraded Cognizant Technology Solutions’ (NASDAQ:CTSH) stock to Neutral from Underweight and downgraded Genpact (NYSE:G) to Underweight from Neutral.
The analysts noted that the sector had a tough H1 ’23, as they have been cutting estimates for an unusually long period (since December 2022), and investors have sold the group to drive underperformance versus S&P 500.
The analysts feel better about achievability of FY23 outlooks, but probably see more downside than upside risk assuming strength in large deal momentum fading is greater than short-cycle work recovering.
Beyond 2023, the firm is cautiously optimstic of a return to pre-COVID levels of growth (in sequential trends in CY24) assuming procurement offices will let loose discretionary projects and large backlogs convert as the calendar year turns to firm up ‘new normal’ budgets.
The analysts added that they continue to recommend ExlService (EXLS) (Overweight rated) as one of their top picks for rest of the year which benefits from both trends.
Cognizant: The analysts said they were upgrading Cognizant to Neutral as recent large deal momentum along with a reasonably conservative outlook set at BOY, creates a better risk/reward profile than they previously considered.
New CEO appears to be making progress on all three priorities — large deals, employee satisfaction and operational discipline — and if execution remains sharp, it should help narrow the growth gap, and then the valuation gap compared to peers, according to the firm.
The analysts are still cautious on mid-term margins to justify their Neutral rating.
Genpact: Relative to Cognizant, the analysts think that Genpact’s stock’s tolerance to continued muted short-cycle work and any potential slowing of large deal backlog is weaker, considering a steeper H2 ramp implied in outlook.
The analysts added that the stock is not costly and they like the bookings momentum, but margin for error appears lower to meet H2 targets which require large deal momentum to continue.
Thus the analysts were swapping their rating with Cognizant and have moved to a relative Underweight on Genpact.