Cognizant's CY11 guidance of atleast 26% growth in revenues reaffirms our positive stance on the demand outlook for Indian IT large caps (Buy Infosys, TCS,

HCL Tech). The CY11 guidance not only assumes higher growth in outsourcing and offshoring but it also assumes a meaningful price increase.

CY11 revenue guidance of at least 26% yoy growth
􀀟 Cognizant guided for revenues of at least US$5.79bn, a growth of at least 26% yoy. This builds in 1Q11 revenue guidance of at least US$1.36bn, a growth of at least 3.8% qoq. This also implies a 2Q11-4Q11 revenue CQGR of 4.2%.

􀀟 Management noted that the annual guidance factors in traction in terms of discretionary spend, normalcy in spending budget outlays and pricing benefits to come from ongoing negotiations.

Key takeaways underscore our positive stance on Indian IT services
􀀟 The management assumes CY11 IT budget for clients to increase by low single digit with significant demand for outsourcing and offshoring services (particularly in Infrastructure management services and BPO besides continuing momentum in traditional outsourcing services). This trend will benefit the Indian IT large caps given their increasing wallet share in outsourcing deal wins and expect their large deal pipeline to remain robust even beyond FY11.

􀀟 Cognizant does not expect any delay in finalisation of CY11 IT budget by clients and has more certainty regarding spend to budget and project starts versus CY10 (in line with our view in our recently released sector report on Indian IT services "Poised for the next leap" dated 4th February 2011).

􀀟 As per management, upside risks to the revenue guidance are: a) higher than expected growth in discretionary spend and b)any significant ramp in the regulatory change driven related IT work (especially in BFSI).

􀀟 Cognizant expects pricing gains to continue even on the base of the qoq increase of 1.5% and 2% in onsite and offshore pricing during 4QCY10. Majority of the Cognizant's clients are receptive regarding price increase given the increasing cost pressure through higher wages and value addition provided by Cognizant.

􀀟 Lastly Cognizant's CY11 guidance assumes flattish EBIT margins of 19-20% (before the stock compensation charge) indicating its high confidence relating to margin management despite headwinds through wage inflation.

􀀟 CY11 GAAP EPS growth guidance of 13.1% factors in higher tax rate of 25% versus 16.5% in CY10.

4Q10 revenues exceed guidance by 3.2%, overall headcount addition of 8.8%
􀀟 Cognizant's 4Q10 revenues were up 7.7% qoq to US$1.31bn, 3.2% ahead of its guidance of US$1.27bn and versus consensus growth estimate of 5.0%.

􀀟 Growth was spread across verticals - Financial services, (+6.6% qoq) Healthcare (+11.9% qoq), Manufacturing/Retail/Logistics (+5.6% qoq) and Communication/Media/Entertainment/Hi-Tech (+6.3% qoq).

􀀟 Geographically, North America grew by 7% qoq, Europe revenues grew by 9.8% qoq(7.1% in constant currency), while Rest of the World grew at 14% qoq.

􀀟 The company added 8,300 staff during the quarter, an increase of c9% on the previous quarter's headcount.