Investors in information technology (IT) stocks got two sets of revenue growth estimates to mull over on Wednesday. Cognizant Technology Solutions Corp. said it expects revenue to grow by 23% to $7.53 billion (around Rs 37,000 crore today) in 2012. The Indian IT and business process outsourcing (BPO) services industry body, Nasscom, said the industry’s exports are expected to rise between 11% and 14% in the year till March 2013.
Nasscom’s president Som Mittal was cited as saying in
The Economic Times newspaper that it’s for the first time that IT companies are not able to predict beyond two quarters. This uncertainty is also reflected in the target range, which is separated by 3 percentage points. Typically, the width of Nasscom’s forecast band is 2 percentage points, like seen in the 16-18% growth target it had set last year.
In contrast, Cognizant’s outlook looks much more positive. What’s more, its revenue streams are more comparable to top IT firms such as Tata Consultancy Services Ltd and Infosys Ltd. About 25% of the industry’s revenue, referred to by Nasscom, come from BPO services. For top-tier companies, however, the BPO business accounts for only around 10% of revenue. BPO services have been growing at a slower pace and could have pulled the overall growth target down for the industry.
Having said that, there is little doubt that IT firms have entered 2012 in the backdrop of much uncertainty. And while Cognizant’s 2012 target is healthy, it expects a slow start to the year. It expects revenue to grow by 2.2% sequentially in the March quarter, which comes on the back of a rather subdued (by Cognizant’s standards) growth of 3.9% in the December quarter. Investors should note that the firm’s annual forecast leaves little room for a meaningful outperformance. In 2011, the firm had started with a year-on-year guidance of 26%, and it ended up with growth of over 33%.
This seems unlikely in 2012. To achieve its annual guidance, revenue will have to post a compounded quarterly growth rate of 6.8% in each of the next three quarters. Revenue rose at roughly that rate in 2011 in the June, September and December quarters. It must be noted, however, that things are materially different this year, with customers facing a lot more uncertainty.
Responding to a question related to the high growth rates expected later in the year, the company’s president Gordon Coburn said on a call with analysts, “If I look at last year, we jumped from about 4% growth up to 8% growth between Q1 (quarter ended March 2011) and Q2, and it stayed about 8% for Q3. So to have Q2 be substantially stronger than Q1 is a normal pattern. Let me explain why. Clients tend to finish their budget cycles in early February, which means January tends to be weak because they don’t release the new budget dollars. And what you see is a pattern. January (is) weak, February is modest and March tends to be good, and then, obviously, you have the full quarter impact in the second quarter.”
He said that to exceed the 23% target, discretionary spending will have to kick in strongly, as the firm has been conservative with assumptions on discretionary spending by customers and on IT spending in Europe.
According to an analyst at a foreign brokerage firm, investors have to face the fact that all is not well as far as the environment is concerned, and Cognizant’s forecast leaves little room for outperformance. In sum, there is no reason to get excited. On the positive side, since analysts have already trimmed growth expectations for FY13, there is no reason to be unduly worried about Nasscom’s relatively bleak outlook as well.
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