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Cognizant sets the pace for Coder Ave

Friday, 9 November 2012 - 10:14am IST | Place: Mumbai | Agency: dna
When times are bad, only the fittest will survive. Nasdaq-listed Cognizant is taking the dictum farther – it is thriving.

When times are bad, only the fittest will survive. Nasdaq-listed Cognizant is taking the dictum farther – it is thriving.

After a string of muted results from peers, the company reported numbers in excess of street estimates for the quarter ended September, with revenues up 5.4% on-quarter to $1.89 billion. Its own guidance was for a 4.4% growth.

Analysts have been quick to lavish praise on the company.

“Cognizant’s growth is significantly ahead of other Indian IT players, ahead of TCS’ growth of 4.6%,” Religare analysts Rumit Dugar and Udit Garg, said in a note on Wednesday.

To be sure, Cognizant also beat Infy’s 2.9% sequential growth and the 3% growth of Wipro and HCL Tech.

This implies that despite the apparent slowdown in US – which contributes 80% to Cognizant’s revenues – the software giant sees neither deal slowdown, nor pricing instability.

Indeed, its guidance for the full year has remained unchanged at 20%, ahead of Infy’s 5% and Nasscom’s 11-14%.

Small wonder, many see the company setting the pace for the industry at large.

“As the market may not be growing enough to accommodate the 15%+ annual revenue growth aspirations of all large Indian IT companies, we believe select firms (TCS, Cognizant and Accenture) will gain market share,” Viju K George and Amit Sharma, analysts with JP Morgan, noted.

Bhuvnesh Singh and Vaibhav Dhasmana, analysts with Barclays Equity Research, appear to concur. “Cognizant’s model of maintaining EBIT margin at 19-20% has allowed the company flexibility in taking up large complex deals that require margin and cash flow flexibility,” they said.

More interestingly, while Cognizant beat TCS in terms of banking, financial services and insurance revenues (7% to TCS’s 3.6%), its manufacturing vertical saw the maximum growth at 10.6%.

Manufacturing is seen to be a booming sector for most IT companies going forward — the reason mid-tier software firm Hexaware is keen on an acquisition in this space.

But Cognizant has flagged at least one worry by predicting revenues of $1.94 billion for the fourth quarter, implying a 2.6% growth, which is well under even the 3.7% guidance Infy has given.

“Weak seasonality, with fewer working days and lack of any possible budget flush in Q4 could lead to a lower sequential growth,” said Religare’s Dugar and Garg.

“TCS and Cognizant’s managements appear to be indicating that 2H could be slower than 1H – this is in contrast with expectations of stronger 2H as indicated by management of Infosys, Wipro, MindTree and Infotech. Revenue growth rates for larger vendors could converge around 3-4% qoq in December quarter,” Morgan Stanley noted.

This also points to flatter IT budgets at large vendors in calendar 2013, compared with 2012.
“However, Accenture and TCS have pointed to improvement in discretionary spending, the JP Morgan analysts noted.




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