Cognizant's weak performance need not worry peers

Cognizant's poor show in the March quarter and the company's revising downwards its revenue growth projections for FY16 show the demand environment in the information technology (IT) services sector continues to be patchy. However, analysts say the reasons Cognizant has cited are mostly company- and client-specific, and are unlikely to have a bearing on the prospects of other Indian players.

In the quarter, Nasdaq-listed Cognizant, which has huge delivery presence in India, reported its lowest quarterly revenue growth. Though the company said it was expecting strong growth in the June quarter, it said the problem in the main revenue-earning banking, financial services and insurance (BFSI) and health care segments continue. In BFSI, it said clients were cutting back on discretionary spending, resulting in delay in project start and spending cut, while consolidation in the health care is taking a toll on spending.

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In the quarter, while revenues from the BFSI declined 1.7 per cent, those from health care fell four per cent, sequentially. BFSI and health care together account for 70 per cent of Cognizant's revenues. While Indian IT services players don't have such huge exposure to health care, most did experienced some drag in BFSI except for Tata Consultancy Services. During its earnings call last month, Infosys said it was experiencing a little of slowdown in the insurance space. However, none of these trends is across the sector to raise an alarm bell.

"The macro environment for IT services remains challenging. However, the cited softness (by Cognizant) in health care and financial services is, in our view, is account-specific," said Tom Reuner, managing director, intelligent automation Research, HfS. "More fundamentally, though, providers have to balance these macro headwinds with transition into the as-a-service economy."

One of the reasons why Cognizant might be losing out speed could be the new-found aggressiveness of Infosys, which has been showing consistent growth for the past many quarters under the leadership of Vishal Sikka.

The Bengaluru-based company has of late become quite aggressive in terms of pricing, while at the same time leveraging automation and artificial intelligence (AI tools) to minimise its impact on the profit margin.

"While the financial service and healthcare markets are decelerating which accounts for some of Cognizant's poor showing, the other contributor to Cognizant (and also TCS') sluggish growth is the rise of Infosys as a price challenger, a position used to be occupied by both of them," said Peter Bendor-Samuel, founder and CEO of Everest Group. "It will be interesting to see how long can they allow Infosys to steal share."

In the March quarter, Infosys stole the limelight with better-than-expected financial numbers and strong growth projections. Industry leader TCS also delivered some strong numbers backed by all-rounded growth by geographies and business verticals.

"Cognizant's dollar revenue growth in the first quarter was below that for Indian IT. However, its second quarter guidance is strong and should grow better than that expected for the Indian IT sector," said a report by Religare Institutional Research.

"That said, we think Cognizant's guidance post-revision is still aggressive for CY16 and back-ended." For calendar year 2016, Cognizant has given a revenue growth guidance of 10-13 per cent.