Cognizant Beats Infosys To Take Second Place

At the end of the previous financial year, the three biggies of the Indian IT industry announced their yearly guidance figures which highlighted the grave situation that the industry has been going through. This was followed by a series of disappointing cues derived from poor quarterly results, low revised guidance, and in some cases, missed forecasts. NASSCOM, the industry body, too forecasted the Indian IT industry to grow by 11-14 per cent in FY13 as compared to its 16-18 per cent projection for FY12.

In terms of guidance, Infosys had, at the beginning of the year, announced a growth forecast of 8-10 per cent. In the quarter ending June 30, 2012, the company saw a sequential decline in both the topline and the bottomline by 1.07 per cent and 10.15 per cent. This was coupled with a revision in guidance, which was brought down to an almost embarrassing 5 per cent.

As compared to this, TCS performed fairly well and beat analyst expectations showing stability even during tough times. The sequential topline growth for the June quarter was a healthy 3.33 per cent. On the same lines, the net profit too saw a sequential growth of 2.89 per cent. It also announced confidence in beating the NASSCOM guidance and so far, they have been in line with this. Wipro’s June quarter results were in line with the guidance provided by the company earlier. It had, at the same time, chosen to remain muted on the yearly guidance figures. Also, the guidance for the next quarter has been a modest 0.3-2.3 per cent.

Q2 2012 Results Of Cognizant

As opposed to the situation where two of the three major listed IT players have been performing in a sloppy manner, Cognizant has been displaying strong performance over the years. The company posted revenue of USD 1.795 billion in Q2 2012 as compared to USD 1.711 billion in Q1 2012 which marks a robust growth of 4.90 per cent, in line with the projected 20 per cent growth for 2012. Even the bottomline registered a strong growth of 3.40 per cent, reaching USD 0.252 billion in Q2 2012 from 0.244 billion in Q1 2012. With these figures, the company beat Infosys and grabbed the second position in terms of revenue.

Nearly a year ago, Cognizant had pushed Wipro to the fourth place by announcing higher revenues. Cognizant has managed to gain considerably in terms of revenue by working with relatively lower margins and thus gaining volumes. While the net profit of Infosys for the quarter under review stood at USD 0.416 billion, the net profit of Cognizant was way lower at USD 0.252 billion.

Revenue For IT Companies In The Quarter Ending June 2012

Over this quarter, Cognizant saw sequential growth in all of the sectors it operates in. This growth was in the range of 0.47 per cent and 7.11 per cent. Even the sectors that are seeing major IT spending cuts like banking and financial services grew by 6.07 per cent. Cognizant’s stronghold in healthcare too benefited because of the cyclic nature of the industry. 

Segment-wise Revenue of Cognizant

In terms of client additions, the company saw some progress with the total number of active clients, increasing from 805 in Q1 2012 to 815 in Q2 2012. At the same time, even the number of strategic clients of Congnizant increased from 196 in Q1 2012 to 202 in Q2 2012. By strategic clients the company refers to the ones offering the potential to generate at least USD 5 million to USD 50 million or more in annual revenues at maturity.

Looking at the future, the company is looking forward to investments in Europe to increase their presence and also to benefit from the slump in Europe to get a better deal on mergers and acquisitions due to the low valuations. With the USD 2.3 billion in cash and short term investments, the company is focusing on targets that have annual revenue of USD 80-100 million. At the same time, the company also expressed its desire to expand in Japan and South America in the next 5 years. A move in this direction would boost profits for Cognizant in the gloomy outlook. At the same time, it's important to note that Infosys is still warming its huge cash pile and that their desire to acquire a target in Europe has yet not changed its inactive status.

This outperformance of Cognizant brings about some positivity among investors about the outlook of the IT industry but this performance has been restricted to a few companies only. In India mid-cap IT firms largely benefited during tough times due to factors like multi sourcing and disintegration of large deals into smaller ones. In any case, the situation in the IT sector will depend on global macro economic conditions and the outlook is likely to remain modest since more than 90 per cent of the revenue is sourced from developed economies witnessing slow growth.