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Cognizant continues to work its magic

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

Shivani Shinde  |  Mumbai 

For R Chandrasekaran, group chief executive, technology and operations, Cognizant, the company's stellar performance for the quarter ended September 30, 2012 is just the validation of the strategy that the company had put in place early on.

Cognizant’s continued strong growth even in a difficult market has surprised many. It has not only taken over India’s top IT services providers Infosys and Wipro, but is also close to take over India’s largest IT services provider Tata Consultancy Services’ (TCS) US revenue. For the quarter ended September TCS reported revenue of $1.506 million from the US, Cognizant reported a revenue of $1.504 million.

When asked how does the company manage to constantly beat peers, Chandrasekaran pointed towards the firms differentiated strategy. “We have a very differentiated strategy whether it is our go-to-market strategy or how we look at financial. We have said that we will maintain margins at 19-20% range and the rest is reinvested into the business. This is helping us to invest and grow faster. We have always looked ahead and invest ahead of the curve. Like building domain expertise that allows us to handle complex work,” he added.

Cognizant’s third quarter revenue, margin and earnings were ahead of what the street had expected. Revenue grew by 5.4% sequentially, compared to the company’s guidance of a 4.7% growth and ahead of its peers by 1.7 - 4.6%. The company also maintained that it will grow by 20% for the financial year 2012. The management did not change its guidance due to a softer fourth quarter. The other reason is also because the company, unlike 2010, does not see any signs of budget flush in the Q4.

For financial year 2013, Chandrasekaran said that the initial discussions with clients (two weeks back it had a customer meet) suggest flat IT budgets.Even for the fourth quarter and for the next year, he believes that the growth drivers would continue to be driven by customer need to cut cost and bring in more business efficiency. The company’s number also reflect the cost pressure that some of the verticals are witnessing.

“For us both our traditional business (ADM) 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. Though it is yet to become a significant part of the revenue we are seeing good traction in the business. We also saw a good growth in our consulting and infrastructure segment which is now 20% of the revenue,” added Chandrasekaran.

For instance, growth for the quarter came from banking and finance services which grew 20% year-on-year and 7% 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% from last quarters drop of 0.4%. 

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% of its revenue, Europe around 16% and rest of the world (which includes APAC) around 4%. For players like TCS, HCL Technologies, Infosys and Wipro revenue from US is around 52 - 63%, Europe’s contribution is above 25% and rest of the world is 10-15%.

“We are conscious about growing our business outside of US. We are pleased 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.

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First Published: Fri, November 09 2012. 19:09 IST