Cognizant's strong shows raise bar for Indian IT services firms

The company's robust numbers, outlook reflect strong demand environment; could snatch market share from rivals

Consistently strong performance by Cognizant over several quarters has raised the bar for Indian information technology service firms, to catch up with the Nasdaq-listed company.

Cognizant posted an all-time high sequential revenue growth, gains in operating profit margins, and growth in all segments and markets during the June quarter. The company also raised its annual revenue forecast for the second time in a row.

Its sequential revenue growth of six per cent against a forecast of 3.4 per cent was the best among the peer group during the quarter. The only company that came close to Cognizant in consistency and performance was Tata Consultancy Services (TCS), India’s largest infotech services exporter.

“Cognizant’s results reiterate our view that, together with TCS, the company remains the benchmark for the India-heritage providers,” said Thomas Reuner, managing director, HfS Research.

“For peers to catch up, they not only need higher margins, but will have to outperform consistently,” he added.



Cognizant’s sequential revenue growth in the June quarter was higher than, in dollar terms, TCS’s 3.5 per cent, Infosys’ 4.5 per cent, Wipro’s 1.1 per cent, and HCL Technologies’ 3.2 per cent. Cognizant was perhaps the only offshore-centric infotech services company to show a productivity gain with an improvement in operating profit margins.

While North America has been a stronghold for Cognizant, over the years, the company has significantly improved its presence in Europe. In the June quarter, the company posted 5.5 per cent sequential revenue growth in Europe to $978 million, $3 million short of Infosys’ revenue from the continent.

The New Jersey-headquartered company posted 7.7 per cent sequential growth in banking, financial services and insurance (BFSI), hitherto dominated by Indian players. This was not only the fastest growth for Cognizant in this segment in the past four years, it was also the best in the sector. So was the company’s revenue growth in health care, retail, logistics and manufacturing.

Cognizant achieved all this by adding only 300 more people, after discounting for staff attrition.

“We caution against extrapolating this performance to Indian infotech services,” JPMorgan analysts Viju K George and Amit Sharma wrote in a post-earnings note on Wednesday. “We would normally tend to extrapolate this to Indian infotech, but there are always multiple interpretations possible,” they added.

They said one explanation could be sector demand was opening up, it could also mean Cognizant was gaining share against the competition and also winning in new or less competitive areas. “Cognizant reflects solid market share gains in ‘competition’ verticals, such as banking, financial services and insurance, manufacturing and retail,” they added.

“After the Indian infotech sector’s relatively weak quarter, there were concerns among investors. Cognizant’s results indicate digital-related spending can more than offset headwinds in traditional services,” said a report by IIFL Institutional Equities.