Cognizant numbers warm the tech heart

But companies prefer to wait and watch before giving the verdict

HYDERABAD/MUMBAI: The much-awaited results of Cognizant Technologies Solutions (CTS) last week have brought the smiles back. But the good cheer is not conclusive as yet.

Given the uncertain commentary by Indian IT majors after the Q3 numbers, save for Satyam Computers, and the subsequent drubbing to the counters on the bourses, the good numbers from the Nasdaq-listed firm will come as a relief to sector watchers.

For the quarter ending December 31, CTS reported revenues of Rs 2,368 crore, up 4.5% sequentially. Owing to the rupee’s rise against the dollar, net profit fell 2.5% to Rs 380 crore.

The much-awaited detail was the company’s guidance for the quarter and the year-end. It did not disappoint, declaring higher-than-anticipated revenue expectation at $640 million for the current quarter, up 7% over the previous three months.

It predicted revenue for the year at $2.95 billion, up 38% against the street expectation of 32-34%. The company plans to end the year with 72,000 - 75,000 employees.

Given that Cognizant derives 81% of its clientele from North America
and particularly from the BFSI vertical, this implies the company expects IT budgets to remain robust, notwithstanding economic uncertainties in the US market.

“The Cognizant results are in line with what we have been saying all through”, said Srinivas Vadlamani, CFO, Satyam Computers. The company had said 85% of its customers had finalised their budgets with increases of 4-5% and that it was hearing bullish talk across all verticals including BFSI.

“The results are good and a sentiment-booster for the sector. The guidance is more than what the Street expected and this proves that the company foresees a demand to remain strong,” said an analyst with a foreign asset management company.

Despite geographical de-risking by Tier-I Indian IT companies over the past few years, the US still accounts for almost 70% of the Indian IT sector’s revenues while the sub-prime crisis and an impending recession have put in doubt prospects from the market. 
 
Encouraging while the Cognizant numbers may be, it may not take much to put the mood back. Extrapolating the good numbers to the future is risky and we should wait for one or two months more before declaring the industry out of the woods, said Satyam’s Srinivas.

“Some time back, everybody was even denying the possibility of a slowdown in the US. Now, we all agree there is a recession. The next question to answer is how deep it will be and whether there will be a soft-landing or a crash-landing,” he cautioned.

Having said that, the industry is banking on the “contrarian theory” that a US recession is good for Indian offshoring. But the caveat here is that while a crash-landing would be detrimental to the industry across the board, it is a soft-landing that the industry is perhaps looking forward to.

How they stack up
Compared to its Indian peers, Cognizant had been the fastest-growing IT services players in past two years.

At over 9%, its compounded sequential revenue growth rate is higher than Infosys (6.7%), Satyam (7.1%), TCS (7.7%), and Wipro (8.5%).

However, owing to factors like higher SG&A (sales, general and administrative) expenses and onsite presence, Cognizant’s profit growth (4.7% CQGR) has trailed Infosys (8.3%), Satyam (6.9%), TCS (7.3%) and Wipro (5.9%).

For the December quarter, Infosys and TCS derived 62% and 54% of their revenues from the US, respectively.

For the quarter ending December 2007, Infosys and TCS derived 62% and 54% of their revenues from the US, respectively.

Over the last eight quarters, CTS has also managed to improve its earnings per share, where its Indian peers have reported negative CQGR. Cognizant’s sequential EPS growth has been 3.9%, against Infosy’s - 1.2%, Satyam’s - 8.6%, and TCS’ - 1.8%.