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

Capgemini 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.