The Cognizant impact

Cognizant shares declined more than 10% on the Nasdaq and the American depository shares of Indian software firms fell by about 6%. Just before Infosys Technologies Ltd reported results a month ago, Cognizant traded at a premium of about 15% based on its trailing price-earnings multiple. This has now practically disappeared, and the premium is a mere 3%.

Evidently, the Indian markets have taken a softer view of the latest comments by one of the largest players in the industry. One reason could be that Cognizant gets 80% of its revenues from clients in North America, much higher than its peers. The contribution of the troubled financial services sector, at 45.5% of revenues, is again much higher than the industry average. Besides, Cognizant benefits much less from the depreciation of the rupee because it does a higher proportion of work onsite. The recent rupee depreciation, therefore, has led to a higher rise in shares for its peers.

It’s also important to note that Cognizant’s statements come a good two-three weeks after those of other IT majors, which reported results in mid-April. The fact that it chooses to be cautious with its guidance is a grim reminder that the uncertainty in the US, especially in the financial services space, could derail growth.

In March, the company had announced a systems integration alliance with T-Systems, where 1,150 employees of the latter joined the company. The revenues from this deal are now part of the annual guidance, but because of the uncertainty in the market, the company hasn’t raised its forecast. In February, it had said annual revenues will grow by “at least" 38%—it’s now saying revenues will grow “approximately" 38%. Some analysts feel even this is a tall task, since sequential growth would have to be as high as 12.5% in both the September and December quarters to achieve the target. Note that sequential growth has been in single digits for the past three quarters and will slip to 5.7% in the June quarter, based on the quarterly guidance.

Back home, Infosys’ valuation has risen to 22.5 times trailing earnings, from less than 18 times prior to its results announcement. Indian IT firms will certainly benefit from the rupee depreciation and the extension of the tax holiday for software parks, but the exuberance about these factors seems to be clouding the impact of the uncertainty in the North American market, the largest for the industry.

Union Bank: ‘exceptional’ quarter

The Union Bank of India scrip has marginally outperformed the BSE Bankex, falling 26% from its January peak compared with the banking index’s 28%. But the stock has shown no sign of euphoria, even after a 128% jump in net profit for the fourth quarter. That’s because, as has been reported, much of Union Bank’s profits were on account of “non-core" items. But, just how much have one-off items contributed to the fantastic net profit growth?

For starters, a big chunk of the growth at the net level has been on account of lower provisions and a tax write-back. At the operating level, profit growth has been Rs890 crore, compared with Rs740 crore a year ago, a 17.4% increase. The company’s “Notes to the Accounts" as advised to BSE say that Rs128 crore charged during earlier quarters on account of the pension liability norm AS-15 has been reversed in the fourth quarter. That leaves the “core" operating profit at Rs762 crore, or a rise of 3% year-on-year. Contrast the bank’s operating profit growth of 36% in the December quarter.

While growth in advances was 19.2% at end-March, the bank has now guided for advances growth of 22% for FY09. Non-interest income growth has been 28% in the fourth quarter, down from 109% in the previous quarter.

Net non-performing assets remain very low and its loan loss coverage ratio is very high. It has also been able to recover significant amounts from bad loans. Although much of its fourth quarter performance is due to one-off factors, the bank’s low cost-to-income ratio and clean balance sheet should ensure a valuation ahead of most other public sector banks.

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