Cognizant continues to work its magic

Initial talks with customers suggest IT budget to be flat for 2013

For R Chandrasekaran, group chief executive (technology and operations), Cognizant, the company’s stellar performance in the quarter ended September is merely the validation of a strategy the company had put in place earlier.

The company’s continued strong growth, even in a difficult market, has surprised many. Cognizant is ahead of Infosys in quarterly revenue for the second consecutive quarter and has also overtaken Wipro in revenue. For the quarter ended September, Tata Consultancy Services reported revenue of $1.506 million from the US; Cognizant’s revenue from the US stood at $1.504 million.

Asked how the company managed to beat peers consistently, Chandrasekaran said, “We have a differentiated strategy---whether it is our go-to-market strategy or how we look at financials. We have said we would maintain margins at 19-20 per cent, and the rest is reinvested into the business. This is helping us invest and grow faster. We have always looked ahead. We invest ahead of the curve. For instance, on building domain expertise, which allows us to handle complex work,” he said. For the quarter ended September, Cognizant’s revenue, margin and earnings were ahead of Street expectations. Revenue grew 5.4 per cent sequentially, compared with the company’s guidance of 4.7 per cent growth. It was also 1.7-4.6 per cent more than the revenue of its peers. The company maintained it would grow 20 per cent this calendar year. The management didn’t change its guidance, owing to a soft fourth quarter (quarter ending December) and the fact that it didn’t see any signs of a budget flush in the quarter.

For 2013, Chandrasekaran said the initial discussions with clients suggested flat information technology budgets. For the quarter ending December and the next year, he believes growth would continue to be driven by the need of customers to cut costs and bring about more business efficiency. The company’s results reflect the cost pressure some of its verticals are facing.

“For us, both our traditional business and the SMAC (social, mobile, analytics and cloud) stack grew this quarter. The traditional business of application development and management allows us to gain market share; the SMAC strategy allows us to gain mindshare of customers,” he said.

Though it is yet to become a significant part of the revenue, we are seeing good traction in the business. We also saw good growth in our consulting and infrastructure segment, which now stand at 20 per cent of the revenue,” said Chandrasekaran.

For instance, growth for the quarter came from banking and finance services which grew 20 per cent year-on-year and 7 per cent sequentially. European clients that have shied away from outsourcing have been embracing it faster due to cost cut pressure. This quarter the company also managed to grow its European revenue share by 7 per cent from last quarters drop of 0.4 per cent.

Though the company is going ahead of its Indian peers, analyst also point out that it is not as diverse as some of the other large players. For Cognizant revenue from US constitute 80 per cent of its revenue, Europe around 16 per cent and rest of the world (which includes APAC) around 4 per cent. For players like TCS, HCL Technologies, Infosys and Wipro revenue from US is around 52 - 63 per cent, Europe’s contribution is above 25 per cent and rest of the world is 10-15 per cent.

“We are conscious about growing our business outside of US. W ere pleases with the traction we have received. Our growth in Europe over the last few quarters has accelerated. APAC is growing well for us. We have never reported the rest of the world numbers but over the last two quarters we have started doing that which shows growth. Our investment in Latin America too should start delivering growth,” said Chandrasekaran