Capgemini Posts Mixed 2022, but We Think 2023 Guidance Is Conservative

Capgemini CAP reported mixed full-year results. While the top line beat our forecasts, earnings per share fell slightly short from our expectations. Nonetheless, with a promising book to bill of 1.16 showcasing healthy demand, we think Capgemini’s fiscal 2023 will be more solid than the outlook even with possible currency headwinds. We continue to believe that Capgemini, as well as other top IT services firms, will benefit from margin expansion over the next five years as IT services mix skews toward higher value add areas. However, we reiterate our no-moat rating for Capgemini, an anomaly among our otherwise moaty IT services coverage, as we have little confidence in the company’s ability to sustain excess returns on invested capital in the long term. As a reminder, Indian IT consultancies, such as TCS and Infosys, have been increasing their mix toward Europe over the past several years, which has further led to pressures on Capgemini. Yet, we believe that the market is baking in Capgemini’s puts and takes properly, as the stock has further approached our fair value estimate over the last month. We are maintaining our EUR 190 fair value estimate for the no-moat company, which places Capgemini in fairly valued territory.

In the fourth quarter, revenue increased by 14% year over year in constant currency to EUR 5.8 billion, beating our expectations due to broad-based strength. The smallest sector, services, posted the greatest revenue growth, at 21% year over year in constant currency, while the largest sector, manufacturing, came in at a close second, growing by 20% in constant currency. All other sectors also had positive revenue growth, though energy & utilities continued to lag the rest of the group, which we believe is a result of the ongoing war in Ukraine. Earnings per share for the year were EUR 8.79, which we think came in below our expectations due to even greater levels of wage inflation than we forecast.