Though not listed in India, Cognizant Technology’s results get the same attention in the stock markets as the other top software companies. So when Cognizant announced a lower guidance, not only did its stock fall by 20 per cent, to touch an eight-month low, but Indian software companies too were affected. At Tuesday noon, the BSE IT index was the biggest sectoral loser, falling over 2.5 per cent.
So what did Cognizant say, that spooked the market?
For the first time since the Lehman Brothers crisis, the company has lowered its forecast for the full year, largely on account of financial services clients in North America. While analysts were apprehensive of the European financial sector, they were increasing getting comfortable with the US economy. Cognizant has stirred up the hornets’ nest.
In its conference call after results, Cognizant’s CEO Francisco D’Souza said, “In North America, the incredible volatility many of our (banking) clients are seeing right now is causing them to pause.” What is true for Cognizant is also true for Indian software giants like TCS, Infosys and Wipro. Cognizant expects banking and pharmaceutical sectors to remain sluggish for the rest of the year.
A consensus seems to be emerging after Infosys and Wipro, with Cognizant becoming the third large IT company to forecast a muted revenue growth. Gartner had also cut worldwide IT spending growth from 4.6 per cent to 3.7 per cent.
In the past few years, Cognizant has become the poster boy of the IT sector, and is the leader in terms of revenue growth. With the BFSI (banking, financial services and insurance) vertical contributing the most to the growth of IT services, analysts are expecting a bleaker scenario for tech stocks.
In terms of sensitivity to its earnings, TCS is expected to be the worst affected as it has the lion’s share coming from the BFSI space. As compared to 41 per cent of its revenue from the BFSI space for Cognizant, TCS derives 43 per cent of its revenue from the sector. BFSI accounts for 35 per cent and 27 per cent of revenue for Infosys and Wipro, respectively.
Commenting on the company’s results, analysts at Jefferies said that the guidance cut is a setback for the bull argument in the sector. Indian IT stocks are likely to trade down in sympathy as the external environment remains the same for all.