Cognizant`s lower guidance bodes ill for IT companies

Uncertainty over clients' IT budget spends forced Nasdaq-listed Indian IT services provider Cognizant to decrease its revenue growth guidance for calendar year 2008 (CY08) from 38 to 31.6 per cent.

This even as the company, a bellwether for the Indian IT industry, reported a 33 per cent year-on-year (YoY) and 6.6 per cent quarter-on-quarter (QoQ) growth in revenue to touch $685.4 million for the second quarter ended June 30, 2008. Net profit for the quarter grew to $103.9 million — up 26 per cent from the same quarter a year ago.
 

DISCONCERTING SIGNS SO FAR

• Outlook for IT firms ‘uncertain’ since global cues remain weak
• Muted rupee-term guidance; no upward revision in dollar-term guidance for most IT firms
• Over-hedging causes forex losses; deprives firms of rupee fall benefit
• Over Rs 900 cr MTM provisioning for Wipro – highest among all IT firms
• Volume growth muted for most firms, implying back-ended growth
• Pricing stable; renegotiation by existing clients in some cases

 

The company now expects revenues to be at $2.81 billion. It has also given muted guidance for the third quarter of CY08 — growth of 5.5 per cent QoQ. Francisco D’Souza, president and CEO of Cognizant, attributed the lower guidance to the "continued deterioration in the macroeconomic environment and sagging consumer and business confidence".

The management cautioned that the turmoil in the US financial sector is spreading to other sectors and the slowdown could impact customers in Europe too. The cautionary note bodes ill for Indian IT companies since the US and Europe jointly account for almost 90 per cent of their revenues.

In Cognizant's case, 78 per cent of its revenues come from the US geography. "The guidance implies that the pressure on the guidance given by Indian players like Infosys and Satyam would continue,” said an analyst from a brokerage firm who did not wish to be quoted. He added that their guidance already has an assumption of low volume growth with companies relying on a revival in the US economy in Q3 and Q4 of FY09. “Already, we have seen Satyam missing its Q1FY09 guidance and resultant correction in its stock price,” he added.

Incidentally, all the IT firms have expressed "caution over the global business environment". Wipro Chairman Azim Premji admitted that "there is a fair amount of pain in the US".

Last month, investors were spooked by muted rupee-term guidance, the lack of upward revision in dollar-term guidance, an uncertain global business environment, forex losses due to over-hedged positions, and low volume growth by the top four Indian IT firms. Infosys, too, did not revise its guidance in dollar terms. TCS does not provide quarterly guidance.

Analysts note that this implies that the growth of these firms merely reflected benefits of a falling rupee against the dollar -- around 4.5 per cent average depreciation this quarter.

Further, all companies posted forex losses -- TCS (Rs 75.3 crore); Infosys (Rs 80 crore); Satyam (Rs 36 crore); and Wipro (Rs 68.30 crore); and HCL Technologies (around Rs 300 crore).

Besides, Wipro made a mark-to-market (MTM) provision of Rs 934 crore with a hedging of $2.6 billion. If the rupee falls further, IT firms that have over-hedged positions may not benefit and are likely to book more forex losses. Mid-cap IT firms performed better than some of the large firms during the April-June quarter due to their niche business focus, lower exposure to the banking and financial services segment and higher utilisation rates.