Cognizant guidance: Little to fear as analysts say no structural demand issues

Cognizant's lowered forecast on account of specific clients, broader demand in IT sector remains strong

Just when positions were being built up in technology stocks of account of a weak rupee, Cognizant announced a lower guidance, spooking those counters. Technology stocks saw selling pressure right from the opening bell with analysts fearing a lower guidance from Indian IT companies as well.  

 

"Due to weakness at certain clients and longer-than-anticipated sales cycles for certain large integrated deals, we are adopting a more conservative stance for the remainder of the year and revising our 2014 revenue guidance to growth of at least 14% over the prior year, while maintaining our full year non-GAAP EPS guidance of $2.54,” Cognizant CEO Francisco D’Souza said in a statement. 

 

The company had earlier projected a growth rate of 16.5%. The revised guidance would mean that Cognizant will be growing at its slowest ever in its 20-year history.

 

Cognizant management, however, stressed that any weakness in the second half of the calendar year will be due to client-specific issues and that demand environment remains strong. 

 

Subsequently, R Chandrasekaran, executive vice chairman of Cognizant, clarified to a business channel that the reduced guidance is on the back of specific and certain client situations. 

 

Clients from the UK in the retail and financial space mainly contributed to the weakness (-4.1% q/q), especially in those companies that have seen changes in management. Therefore, chances are that other Indian software companies might not have to face a similar decline in growth. 

 

Analysts seem to agree with this explanation for Cognizant’s revised guidelines, citing precedent. 

 

Barclays’ analysts Bhuvesh Singh and Hitesh Das point out that IT major Infosys went through a similar situation in March 2014 quarter, arguing that even when overall demand environment remains positive, client-specific challenges may hurt a company. Barclays, therefore, believes that Indian vendors, and TCS in particular, will continue to gain market share.

 

Ashwin Mehta and Pinku Pappan of Nomura also discount any structural demand issues. In a report on Cognizant’s results, the duo say they do not see a case of permanent demand impairment and that the company’s long term growth outlook is intact.

 

Tata Consultancy Services CEO N Chandrasekaran also said that the market is quite strong, customers are spending money, technology adoption is on the increase and that the US and European markets are doing well. 

 

“So I do believe that the industry and the broader market will continue to do well. There may be individual specific issues from time to time,” he said in an interview to  CNBC-TV 18.

 

New hires and falling attrition rates also seem to bear out Cognizant’s argument. The firm has been less affected by the high levels of attrition that are common to most top Indian IT firms, bar TCS. 

 

Though annualized attrition at Cognizant touched 16.9% during the June quarter, it was 200 bps lower from the same period last year. The company said it added 8800 persons (net) – its highest since the third quarter of 2011 – in a quarter where its peers recruited fewer people.

 

Cognizant also said that it expanded its stock repurchase programme from $1.5 billion to $2 billion, a development that Infosys investors could potentially invoke in their recent demand for a buyback plan.