IT stocks fall after Cognizant cuts 2019 revenue guidance; TCS drops 2%

Cognizant forecast 2019 revenue growth in the range of 3.6 per cent and 5.1 per cent in constant currency, compared with between 7 per cent and 9 per cent earlier.

Information technology (IT) stocks came under pressure in the early trade on Friday, after the US-based IT services company Cognizant nearly halved its 2019 revenue expectations after missing first-quarter results, as it faces sluggish demand in its financial and healthcare businesses. 

At 09:57 am, the Nifty IT index was trading at 16,157 levels, down 246 points or 1.50 per cent with all the 10 constituents in the red. NIIT Tech, Tech Mahindra and TCS were the top losers, falling over 2 per cent each. The index was the biggest sectoral loser on NSE. In comparison, the Nifty50 index was trading over 21 points or 0.18 per cent higher at 11,746. 

REVENUE GROWTH FORECAST

Cognizant forecast 2019 revenue growth in the range of 3.6 per cent and 5.1 per cent in constant currency (CC), compared with between 7 per cent and 9 per cent earlier. The company said it was seeing some cautiousness in the banking sector around levels of spending in the second half of the year. Net income slipped 15 per cent to $441 million during the first quarter of the year ended March 31, 2019, as compared to $520 million during same period last year.

Revenue from healthcare, which accounts to 28.3 per cent of its overall revenue, grew 3.9 per cent year-over-year and 4.6 per cent in constant currency. Segment revenue was negatively impacted by continued industry consolidation as well as the accelerated movement of work to a captive at a large North American client. Life Sciences delivered above company average growth, driven by large enterprise deals and momentum with our industry specific platforms. CLICK TO READ THE FULL REPORT

"Cognizant's poor performance surprised us. Weak revenue growth and guidance cut reflects execution challenges at in the company rather than industry-wide growth slowdown. The transition to a profitable growth model initiated a couple of years back had its share of challenges which have been compounded by slippages in execution. The new CEO has a challenge at hand," said a report from Kotak Institutional Equities.

Adding: "We would not be surprised with a few leadership changes, common in any turnaround effort. Against this backdrop, ability of the company to deliver board-backed medium term revenue growth target of 7-11% and EBIT margin of 19% with 10 bps expansion every year seems unrealistic to execute in the near term."

MIXED BAG

Back home, largecap IT players such as Infosys, TCS and Wipro recently announced their March quarter results. While TCS delivered strong growth on all fronts, Infosys disappointed the Street as it lowered growth guidance for FY20. For Wipro, most analysts believe the stock is expected to underperform peers, given the modest performance in the recently concluded quarter and soft guidance for the first quarter of financial year 2020 (1QFY20).

Over the last one year, the Nifty IT index has risen over 19 per cent, thus outperforming the benchmark Nifty50 index, which gained 9 per cent during the same period.