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Cognizant's V-C stumped by its growth

Size of targeted firms for M&As increases from $10-20 mn to $80-100 mn

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Like many in the industry, Lakshmi Narayanan, the vice-chairman and ex-chief executive of Cognizant Technology Solutions, is surprised at the speed with which the Nasdaq-listed company has overtaken some of its peers.

Narayanan, who has been with the company since 1994 and was instrumental in formulating the company’s strategy, agrees that the trail-blazing performance of Cognizant has created some awkward moments for him when he meets with peers and ex-colleagues.

“From the beginning, our strategy was to focus on the customer, so we knew that we would be growing. We were also sure that we would be growing faster than the industry. But what came as a surprise was the quantum of growth. And, the margin by which we have led this growth from the rest of the competition was something that took us by surprise,” he said.

The growth in size is also evident in the growing size of its merger and acquisition targets. With $2.4 billion in cash, Narayanan agrees that one of the use of cash on books will be for acquisitions. “Our business needs a strong balance sheet. Especially when you are competing with global players, and who can then leverage it for competitive reasons. Moreover, our size of acquisition has also grown as we have become bigger. Over the years, we have targeted firms in $10-20 million segment. Today, we are comfortable with firms with a $80-100 million revenue,” he said.

With a career span of over 30 years in the information technology services industry, Narayanan has only worked for only two companies. He started his career in 1976 with Tata Consultancy Services and after 18 years there, moved to Cognizant.

Having witnessed the industry grow from scratch, Narayanan believes the industry has the wherewithal to overcome some of the recent challenges, especially the visa issue.

“Despite the restriction, there is no single company that will say they have not been able to grow or would have grown faster because of visa issues. Companies have invested in creating near shore centres, in technology like video-conference, or looked for solutions like using short-term projects, etc., visa is not a big challenge. It may be an irritant but not a significant factor to lessen the pace of growth,” he added. The company has also started to hire freshers from US campuses as it looks at increasing its hiring in the US.

Though the company has managed to grow faster and better than the industry and peers, analysts point the growth is losing speed. For 2012, Cognizant has guided for a growth of 23 per cent, compared with 33 per cent in 2011. The current guidance, many point, also does not leave room for outperformance, with a sequential growth of 6.8 per cent. Many are also worried that the company has over 80 per cent of revenue coming from the US alone. Besides, during the December quarter, the firm’s Europe growth was down 5.6 per cent sequentially, when some of its peers like and did significantly better.

Ask Narayanan about these issues and he calmly says, these are not major concerns. “Our market share in the US is higher because it is by design and planned. We would want to play to our strength. So, the US is not a worry. As for Europe, we figured it will be a somewhat difficult region. But we are continuing to be focused, so when growth comes, we do not miss the opportunity. Since the size of our European business is less, we are less impacted by the region’s turmoil,” he said.

Rather, sometimes the company’s position has pushed it in a corner. While Cognizant’s business model is similar to Indian peers like TCS, Infosys and Wipro, with majority of workforce based out of India, the company is headquartered in the US and listed on the bourses there. “Sometimes we are at a competitive disadvantage in the domestic market. Simply because Indian firms can sell their story by saying a global firm is using their services despite being an Indian firm, then why not them. Then we get bracketed along with the and others,” he added.

Despite the company doing well, Narayanan has concerns. “I think some of the challenges we have is to figure out the next big disruption. How can we maintain the culture of the company, as it becomes bigger and expands to new geographies. And lastly, how do we constantly get access to skilled talent,” he said.

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