Will Cognizant topple Wipro in December quarter?

Will it overtake Wipro? Will it not? These are the questions the people watching Cognizant Technology Solution Corp (CTSH) are asking on the eve of its fourth quarter and calendar year 2010 results.

Unlike the top three Indian tech majors Tata Consultancy Services (TCS), Infosys Technologies and Wipro, Cognizant follows a financial year from January to December.

The company is due to announce its numbers today.

While most analysts expect the Nasdaq-listed company to topple the third-largest information technology services firm Wipro to grab its position in terms of revenues in the December quarter, there are some who believe it would take Cognizant a few more quarters to do that.

“They (Cognizant) may close the revenue gap in the December quarter (with Wipro), but I have my doubts whether they will beat them (Wipro). For that, it will take another 2-3 quarters,” an analyst with a local broking house said on the condition of anonymity.

Some analysts see Cognizant growing 39% for the full year.

Religare analysts Rumit Dugar, Manoj Singla and Udit Garg estimate Cognizant’s full-year revenues to end at $4.57 billion, a tad ahead of Wipro’s fiscal 2010 — April 2009 to March 2010 — revenues of $4.39 billion.
“Overall, CY10 (calendar year 2010) is likely to be another strong year for CTSH (at around 39% year-on-year revenue growth of $4.57 billon), further closing the revenue differential with Infosys,” they wrote in their report brought out last week.

The Religare analysts’ forecast for CTSH’s revenues in the fourth quarter is $1.29 billion, close to 6% growth over its September quarter revenues of $1.21 billion. Their estimate is ahead of Cognizant’s sequential revenue growth guidance of 4%.

JP Morgan analysts Tien-tsin Huang and Puneet Jain predict it to close the quarter with revenues of $1.28 billion. Wipro’s revenues in the December quarter grew 5.6% to $1.34 billion while TCS’ and Infosys’ stood at $2.14 billion and $1.58 billion respectively.

The Azim Premji-owned company has given a guidance of 3-5% revenue growth of between $1.31-1.34 billion for the March quarter.

Interestingly, what analysts will watch out for is the US-headquartered tech company’s growth outlook for CY11, which they expect to cool off a little.
“While a slowdown in CY11 revenue growth (relative to CY10 levels) should not surprise many investors, we believe many investors will use CY11 growth as a proxy of normalised growth over the medium term. We expect the company to guide for CY11 guidance in mid-twenties which should be “good enough.” Our views on medium term growth in mid-twenties stem from around 30% CY10 growth in the company’s maintenance business and CTSH’s 2-year (2009-10) CAGR of 27%,” said Huang and Jain of J P Morgan.

At the same time, they believe that, like in the past, Cognizant will deliver beyond its understated guidance. “CTSH, in our view, has re-built its reputation of issuing conservative guidance and leaving room to raise expectations throughout the year —- we expect the trend should continue in CY11,” said the J P Morgan analysts.

The Religare analysts said they will view Cognizant’s guidance for the CY11 as the barometer of demand in the current year. “We believe CTSH’s CY11 guidance is likely to be a key data point and will reflect how good the demand environment actually is. We expect the company to guide to around 23-24% dollar revenue growth for CY11 and 4% QoQ revenue growth for Q1CY11.

However, we would be surprised if guidance tops 30%, which would reflect a stronger demand environment than our expectations and could potentially mean upside risks to our numbers,” they wrote in their report brought out last week.