Bangalore: After India’s top software firms raised hope of a revival in the sector this year, the Street is looking to Cognizant Technology Solutions Corp. for confirmation.
Analysts already expect Cognizant to beat their final-quarter and 2012 forecasts, and the number they will be focusing on when it announces results on 7 February is revenue growth prediction for 2013.
Cognizant in December indicated revenue growth of 16% for this year in a regulatory filing on executive compensation, but analysts are a tad more hopeful and see sales rising 17-20%. Revenue growth for 2012—Cognizant follows a January-December reporting year—is seen at 20%.
“The most important metric investors will look for is what they guide for revenue growth in FY 2013 (ending in December this year), and based on their own 8K filing—where they have indicated that the management incentives will be linked to 16% revenue growth achievement—the expectation is that they will probably guide to 16-17%,” said an analyst at a foreign brokerage, declining to be identified because of his company’s policy.
“I think 17% will be neutral territory for the stock, and anything above or below will be positive or negative surprise,” this analyst added.
An 8k filing is a mandatory report to be made to the US market regulator on any important corporate event.
Cognizant is the only one among the top information technology (IT) firms still offering quarterly and annual forecasts—most rivals, including Infosys Ltd, the sector’s former bellwether, stopped giving estimates after missing their own numbers several times—and is increasingly being seen as a barometer of industry potential.
The company is listed on the Nasdaq and based in New Jersey in the US, but traces its origins to Chennai, and has most of its employees in India. In the last few years, it has consistently outpaced both analysts’ expectations for the firm and industry lobby National Association of Software and Services Companies’ (Nasscom) growth projections for the sector.
Nasscom estimates India’s software services industry will grow at 11-14% in the 2013 fiscal ending 31 March. It will announce its growth projections for fiscal 2014 in the second week of February.
For the year ended 31 December, analysts expect Cognizant’s net profit to increase by 60% to $1.41 billion (about Rs.7,521 crore) on a 20% rise in revenue to $7.35 billion (Rs.39,124 crore), according to Bloomberg estimates.
In comparison, Tata Consultancy Services Ltd (TCS), considered the industry bellwether after Infosys, is expected to post a profit of Rs.13,933 crore on a revenue of Rs.62,987 crore for fiscal 2013, and Infosys a full-year profit of Rs.9,074 crore on a revenue of Rs.39,674 crore.
India’s top IT companies reported better-than-expected earnings for the latest December quarter after several periods of disappointing results as clients in the US and Europe, their biggest markets, tightened their IT budgets.
Cognizant, on the other hand, has not missed its quarterly projections in a decade, according to data from analysts and company reports, and has upset the pecking order at the top of the IT industry, having overtaken both Infosys and Wipro Ltd in terms of quarterly revenue.
Cognizant is also close to overtaking industry leader TCS in terms of revenue earned from North America—the world’s biggest IT market. At the end of the September quarter, Cognizant was within sniffing distance of TCS in North America with revenue of $1.504 billion—just $1.6 million shy of TCS’s.
It’s not that Cognizant has been immune to the global economic slowdown; it lowered its revenue growth forecast for 2012 from 23% to 20%, but analysts see this as a one-off and still a better projection than for most other tier-1 firms such as Infosys, which cut its forecast for fiscal 2012-13 from 8-10% to 5%.
But analysts cautioned that while Cognizant will continue to stay ahead of the industry in terms of growth, its pace could slow in the near term.
Many of India’s top IT firms are slowly catching up with Cognizant, and the company will find it hard to outpace the industry at the level it has been maintaining the past four years, Ravi Menon, analyst at Equirus Capital Pvt. Ltd, said by phone. “It might be interesting to see when growth starts to slow down a little bit, what sort of restructuring would they do. They haven’t really tinkered much with their organizational structure till now,” said Menon.