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Cognizant posts good results, but weak forecast

Cognizant posts good results, but weak forecast
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First Published: Fri, Nov 07 2008. 12 30 AM IST

Updated: Fri, Nov 07 2008. 09 21 AM IST
Technology and outsourcing services company, Cognizant Technology Solutions Corp., reported good results for the September quarter, with revenues increasing by 7.2% compared with the previous three months, and operating profit rising by as much as 19.2%.
The growth in profit was aided by a favourable foreign exchange movement and sharp increase in employee utilization. But that doesn’t take away from the fact that underlying business growth has also been decent. Much has been said about the company’s high exposure (46%) to banking and financial services, but this segment continues to grow at a rate that’s higher than the company average.
But the good news stops with the September quarter results. The guidance for the December quarter, in fact, has been lowered.
Based on the forecast three months ago, the company had estimated revenues of $723 million (Rs3,449 crore today) in the September quarter and $758.5 million in the December quarter.
While it easily beat its guidance for the September quarter by reporting revenues of $734.7 million, the target for the December quarter has been lowered to $746.7 million.
The management told analysts in a conference call that “we want to maintain some caution on expectations for growth next quarter”.
While the current economic environment is the main reason for caution, the company is also facing other headwinds such as adverse currency movements relating to revenues it earns in Europe. Because of the sharp fall of European currencies, revenues from this region get impacted when converted into dollars, the functional currency for the US-headquartered company.
Still, some analysts tracking the firm are worried about the low growth guidance for the December quarter. The forecast assumes year-on-year revenue growth rate of just 24.4%, the lowest since the second quarter of fiscal year 2001-02, or the worst since the technology bust.
The company has also said clients’ budget-making process should get postponed by two-three months, and the pick-up in spending it normally sees during the December quarter is not expected to happen this time around.
Some analysts have lowered forecasts for the next year based on these statements and the negative news on the economic environment. They are now talking of a revenue growth rate of about 15% for next year. Bank of America Securities, for instance, has lowered revenue growth estimate for 2009 to 15.8%, from 25.8% earlier.
In the past few years, Cognizant has been growing at a rate that’s about 10 percentage points higher than the industry. Even this year, while the industry is expected to grow by about 20%, Cognizant is all set to achieve a growth of 32%.
The moot question is if Cognizant grows at just 15% next year, as some US analysts are now predicting, how low could other Indian IT players go?
Write to us at marktomarket@livemint.com
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First Published: Fri, Nov 07 2008. 12 30 AM IST