Cognizant Technology Solutions Corp.’s results for the March quarter last week confirmed the trend of robust revenue growth and stable margins for top-tier IT firms.
Cognizant’s revenue grew by 6.3% sequentially to $960 million (Rs4,320 crore), higher than the growth of 5.2% reported by Infosys Technologies. Revenues of the top five technology services companies grew by 4.4% last quarter.
According to a recent report by IIFL Cap, the industry’s growth was broad-based, with most service lines and industry business segments growing at a healthy pace. In the previous quarters, growth was led by the financial sector, with integration work related to mergers and acquisitions as well as projects linked to regulatory compliance leading to an increase in work from such companies.
In the March quarter, almost all industries grew strongly, with some sectors of manufacturing, technology, and energy and utilities doing exceptionally well.
What’s more, there was decent growth in discretionary services such as package implementation. In Cognizant’s case, for instance, application development work, which is discretionary in nature, grew by 9% sequentially last quarter, compared with a 4% growth in application maintenance work.
With top-tier companies having fired on all cylinders last quarter, investors are excited about the industry’s prospects. Although it must be noted here that mid- and small-sized companies continue to lag their larger peers in terms of growth.
Another reason near-term prospects look good is the high rate at which companies are adding to their employee base. Cognizant led with an over 9% addition to its technical staff last quarter, followed by Tata Consultancy Services, which raised its employee base by over 7%.
The top companies also did well in managing profitability, especially keeping in mind the sharp rise in the rupee last quarter. Three of the top five companies improved margins despite this impact.
The only chink in the armour seems to be a sharp increase in attrition rates for most companies, which in turn has led to a higher-than-expected increase in wages this year. This problem, of course, will affect smaller companies more while larger companies should be able to better manage margins.
While the going seems good, there seems to be a note of caution in Cognizant’s guidance for the second half of this calendar year. The company grew revenue by 6.3% in the March quarter and expects it to grow by 5.8% in the June quarter. But for the remaining two quarters of the year, it has forecast a growth of only about 3.1%.
Based on current valuations, investors are pricing in an increase in growth rates in the second half of the year, which leaves room for some disappointment.
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