Capgemini Earnings: Mild Guidance Ahead; However, Demand Signals Relatively Strong

Capgemini CAP reported first-quarter results with total revenue largely in line with our forecast. While the firm’s book/bill of 1.02 in the quarter is weak compared with peers, it is strong relative to Capgemini’s average since 2017 of 0.99. As a result, we think demand for Capgemini offerings is in a relatively solid place despite near-term headwinds. Overall, we believe that Capgemini, along with its peers, will benefit from margin expansion in the coming years as their mix shifts toward higher-value add areas, thanks to digital transformation trends. However, we reiterate our no-moat rating for Capgemini, as we have little conviction in the firm’s ability to maintain excess returns on invested capital in the long run. With competitors such as TCS and Infosys increasing its mix toward Europe, we do not see the pressure on Capgemini alleviating anytime soon. Balancing near-term headwinds with our long-term thesis, we are maintaining our EUR 190 fair value estimate. In our view, the decline in share price signals the market being overly cautious, and we therefore believe current shares are attractive.

In the first quarter, revenue increased by 10.7% in constant currency to EUR 5.8 billion, with currency having a 0.2-point tailwind on reported revenue. Revenue growth by sector displayed more variance than in previous quarters, with manufacturing, public sector and services delivering double-digit growth in constant currency. Financial services grew 9.4% in constant currency, where the firm was pleased to see continued momentum, rather than anticipated deceleration. In contrast, energy and utilities, consumer goods and retail and telecom, media and technology lagged, delivering low- to mid-single-digit growth in constant currency.

On a segment basis, Capgemini’s strategy and transformation segment saw the greatest constant currency year-over-year growth at 16%, as firms prioritize digital transformation amid a tough macro environment.