Infy may overtake Cognizant on revenue front after a decade, say analysts

Slow growth rate and execution challenges impact Cognizant Q4 performance

Slowing growth and execution challenges for Cognizant (CTSH) may well allow Infosys to overtake the former after a decade. Cognizant had marched ahead of Infosys in terms of revenue in the first quarter of financial year 2012-13.

The Nasdaq-listed IT services firm’s performance in Q3 and the guidance for Q4 and full-year 2022 suggest that it could take time for Cognizant to see the expected improvement in performance from its decision to restructure. Cognizant follows a January-December financial year.

“CTSH has enjoyed a comfortable lead over Infosys in revenues. That lead is narrowing, with the gap in revenues between the two companies down to just 6.6 per cent. Infosys’ quarterly revenue run-rate of $4.555 billion is just $300 million away from CTSH’s revenues. Infosys’ headcount at 345,000 employees is just 4,000 shy of CTSH. We would not be surprised if Infosys reclaims revenue leadership over CTSH in the coming quarters,” said a report by Kawaljeet Saluja and Sathishkumar S of Kotak Institutional Equities.

This comes in the backdrop of falling revenue targets. Cognizant indicated that revenue could decline by 0.2-1.2 per cent in Q4 (growth of 2-3 per cent in constant currency). This also means that its full-year guidance has also been pared. The company now expects its FY22 guidance to be 7 per cent in constant currency from the earlier 8.5-9.5 per cent.

In Q3, Cognizant reported a revenue of $4.9 billion, which was a growth of 5.6 per cent in constant currency terms. This was lower than expected and did not meet the lower end of the company’s own Q3 guidance. Cognizant had guided for a revenue of $4.98-$5.03 billion.

Moreover, bookings declined 2 per cent year-over-year and represented an in-period book-to-bill of approximately 1x. This resulted in trailing 12-month bookings of $23.1 billion.

The company also saw growth taper in some of its verticals, including BFSI and healthcare.

The Kotak report stated: “Financial services is a large vertical for all companies. CTSH has been losing share to competitors in large banking accounts. The anaemic growth does indicate continuing loss of share. The healthcare vertical’s growth has also slowed to 5.5 per cent, while peers continue to grow at a higher rate, indicating a relative loss of wallet share.”

The firm cited headwinds from currency, lower North America billable headcount, which they expect to take several quarters to improve, and softer-than-expected bookings growth for this performance.

The larger issue, however, appears to be attrition. Till a few quarters ago, attrition at its offshore centres had impacted operations, this time the management said onshore attrition and the uncertain economic condition impacted performance.

“Revenue and bookings were below our expectations as company specific fulfillment challenges were compounded by the impact of an uncertain macroeconomic backdrop,” said Brian Humphries, its chief executive officer. “We are confident the steps we are taking will return the company to accelerated growth over the medium to long term.”

During the earnings call, Humphries said while a non-certain macroeconomic backdrop impacted bookings and revenue, “the primary driver of the revenue shortfall relates to a reduction in US onshore billable resources in recent quarters, following a period of elevated attrition, a reduction in visa travel and a Covid-induced shift in the near and offshore delivery centres”.