Cognizant's 16% growth estimate drags IT stocks

Filings with SEC suggest a rebound in growth is unlikely next year, too

Technology stocks took a beating on Wednesday on news that the sector’s poster boy, Cognizant, was expecting to grow by 16 per cent in 2013. The market has been building in optimistic growth estimates for FY14, after a rather lacklustre show by many players so far. So, Cognizant’s regulatory filings in the US, indicating a revenue growth of 16 per cent, have stunned many. The BSE IT Index fell 1.22 per cent.

Given that Cognizant has grown at 20 per cent in these challenging times, the market was expecting the sector leaders to continue their outperformance in the year ahead. However, analysts, disenchanted with the sector, say this was expected as tech spends are not showing signs of picking up. Given that budgets are frozen and new deals are few and far in between, growth is likely to remain at current levels at best. The industry is unlikely to grow anywhere near 20 per cent levels in the coming years, as the outsourcing market has increasingly become fragmented and business environment remains challenging. One analyst says players like Atos and CapGemini are becoming aggressive, not good news for Indian companies.

So, what’s in store for tech stocks? Most analysts say share prices of the better performers will move in a tight band of 10 per cent, while those unable to keep pace with the sector leaders will come under selling pressure. Overall, the sector will, at best, grow in a 13-16 per cent range in FY14. While many argue that some players are sacrificing margins to grow, analysts say pricing is only one of the components. Delivery, platform play and client relationships are key factors that determine deal wins. So it is not only about growing at the expense of rivals. On this front, analysts believe TCS is better placed than peers. The company has recently conveyed to Nomura’s analysts that it is optimistic about growth in FY14, as customer sentiment is better than last year. TCS has also conveyed that its strong performance in enterprise application services is due to a high level of CEO-connect. In the absence of capability differences, deals are being won on the basis of vendor’s strategic importance.

The market continues to believe that TCS and HCL Tech are better placed than Wipro and Infosys. Though Infosys has shown renewed emphasis on traditional business and increased flexibility on deals and pricing, which will help correct its underperformance, analysts believe that if it continues to miss its guidance, the stock will not generate meaningful returns.