Cognizant investors wary of bribery probe outcome, management time

Citigroup downgrades stock, slashes price target to $55 from $68, after keeping it at buy for nearly three years

Cognizant Technology Solutions, the software bellwether that saw its investors losing over $ 4.5 billion on Friday could face more headwinds as analysts fear that the bribery charges it is investigating in India could be quite serious.

The untimely exit of its long-time employee and President Gordon Coburn, who was its chief financial officer till 2012, adds to the problems for Cognizant, which has cut its revenue forecast twice this year citing uncertain business environment.

Ashwin Shirvaikar of Citigroup downgraded the stock and slashed his stock price target to $55 from $68, after keeping the stock at buy for nearly three years.

In his report he said, "While it is too early to know the specifics of the investigation, the possible violations appear to be quite serious, especially since the company's President Coburn resigned."

Other investors are also feel the lack of details on Coburn's exit, which co-incides with the launch of the investigations.

"Investors will be a little sceptical because Cognizant has lost one of the senior-most people in the company. They are wondering if this issue has some penalty implications for the company or some business implications and wonder whether some clients may act in an adverse manner," said an analyst with a leading domestic brokerage who requested anonymity. "Everything is in the air and investors will have a hands-off approach on the stock till some clarity emerges on this issue"

Teaneck, New Jersey-based Cognizant, which has four out of its five employees in offshore centres such as India, is expecting its slowest revenue growth this year.

Analysts have downgraded Cognizant's stock to neutral from buy. The development comes after the company disclosed an internal investigation, related to certain payments it made to facilities in India that violated the US Foreign Corruption Practices Act.

Experts said that company's valuation remains attractive, but the stock is likely categorised as "uninvestable" to many investors, because of the skeletons that would emerge due to the fallout of the bribery investigations. They are also concerned over the management bandwidth these investigations would consume, which otherwise could be used for business purposes in an uncertain environment.

Cognizant is already facing project cancellations and rampdowns from its clients in financial services and healthcare verticals.

To Business Standard's query on what could be possible impact on the company, Cognizant spokesperson said, "The internal investigation is in its early stages, and the company is not able to predict what, if any, action may be taken by the DOJ, SEC or any governmental authority in connection with the investigation or the effect of the matter on the company's operations, cash flows or financial position".

On Friday, Cognizant's stock fell $7.37, or 13.4 per cent, to $47.63, wiping out about $4.5 billion in market value.

Citigroup, which downgraded Cognizant Technology to neutral from buy citing the investigation, cut the Cognizant Technology stock price target to $55 from $68.

Shares in Cognizant Technology Solutions Corp. have risen as high as $69.8 in the past 52 weeks, while the lowest price in the last 52 weeks has been $45.44. The 50-day moving average of the business is $56.23 and its 200-day moving average is $58.85.

While the stock's valuation remains attractive, given the company's fundamental strength, the research firm also said it recognises that the stock is likely "uninvestable" to many investors due to a combination of near-term factors that serve as an overhang.

The price fell as much as 17.4 percent to $45.44, its lowest in more than two years. Cognizant is based in Teaneck, New Jersey but about three-quarters of its employees are in India.

Outlook

During the second quarter ended June 30, 2016, Cognizant posted revenue growth across its units, but it had cut its revenue forecast for the year.

Cognizant gave guidance of $13.47-13.60 billion this year, down from $13.65-14 billion previously. The company cited "near-term macroeconomic headwinds."

During the quarter ended June 30, 2016, the company reported a 40 per cent drop in profit of $252.4 million during the quarter from $420.1 million, a year ago. Revenue rose by 9.2 per cent to $3.37 billion.

Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 13.67 per cent. This year, analysts are forecasting earnings increase of 4.13 per cent over last year. Analysts expect earnings growth next year of 10.56 per cent over this year's forecasted earnings.