Taking A Byte Out Of IT’s Growth?

For quite some time now, Cognizant has been outperforming other Indian IT companies. High growth rates have led it to become the second largest IT player in terms of revenues, thus placed between TCS and Infosys. But this fast runner is facing hurdles lately due to various global factors. Poor economic conditions have led to reduced IT budgets and delayed decision making. At the same time, secular changes in technological trends has had IT companies readjust their offerings and functioning.

Originally, Cognizant had estimated a revenue growth of 23% for 2012. In December 2011, it had announced that 100% of the performance units will be awarded if the company achieved revenues of USD 7.53 billion in 2012 (23% growth over 2011). Later, in February 2012, when it actually announced its guidance for the year it too turned out to be the same at 23%.

However, a worsening of the global economic outlook having affected demand from the key geographies of US and Europe saw the company revise this guidance to 20%. A guidance of 20% translates into estimated revenues of close to USD 7.35 billion for 2012. Not bad, isn’t it?

But the worry is not what will happen in 2012. That year is almost behind us.  Problem is, the outlook for Cognizant for 2013 is looking quite bleak. Although the company hasn’t officially announced their revenue estimates for 2013, the 8-K form filed by Cognizant with the SEC (U.S. Securities and Exchange Commission) indicates a subdued growth expectation. The filing details performance-based incentives for its employees as shown in the box alongside.

Assuming that the revenues for Cognizant are in line with the estimated 20% growth (USD 7.35 billion) in 2012, the company has decided to dole out 100% performance units if it achieves a revenue of USD 8.52 billion. This translates into a growth of 16% over its expected revenues of 2012. This figure is way lower than the average 30.41% growth rate of Cognizant in the last 5 years. Even if you were to look at the highest band of performance units that are likely to be awarded, Cognizant may end up with a lower growth rate of 25 per cent in revenues against its five-year average.  

While it spells a really precarious situation for Cognizant, it also means that the Indian IT sector is bound to face a lot of headwinds going forward in light of the fact that the best performer in the industry will probably see its growth rates halve in the coming year. The fallout of this is already becoming visible on the bourses. The BSE IT index is already down 2.57% over the past two days and a further decline cannot be ruled out.

As we’ve established earlier, working on vertical expertise, inorganic growth, pricing and offerings is key for IT companies to steer through these tough times. Which of the companies are well poised to weather any such storm that may arise? As we have mentioned earlier, we reiterate our bullish stance on Persistent Systems, HCL Tech, Polaris Financial Technology and Tech Mahindra.