One of the top five information technology (IT) outsourcing firms with operations in India, Cognizant Technology Solutions Corp. has cut its growth outlook for the second half of 2008.
(FACTORING IN BAD NEWS) About three months ago, its annual guidance implied revenues would grow by an average 12.6% in the September and December quarters. Most IT companies had then said growth in the fiscal to March 2009 would be back-ended, meaning that growth in the second half would be higher than that in the first half.
But the tough reality in the past three months has caused the company to change that stance. It now says revenues will grow 5.5% in the September quarter and 5% in the December quarter. Growth in the first two quarters of the year were 7.2% and 6.6%, respectively. So, instead of back-ended growth, the firm faces a slowdown.
In the company’s post-results commentary to analysts, it said talks with customers indicate that the slowdown in the economy will impact even sectors outside financial services and health care.
Health care clients pulled back plans for discretionary spending and one of Cognizant’s top five clients in health care has said it plans to scale back spending in the second half of the year owing to business pressures. While financial services revenues grew by an impressive 7% last quarter, it’s too early to say the trend will continue. Cognizant has said it continues to maintain a cautious view for the sector for the remainder of the year. On the positive side, some financial firms have increased spendings on outsourcing to cut costs.
The Cognizant stock was flat after the results were announced, indicating that the markets had already factored in the rationalization of the growth outlook. Some of this was evident in the company’s commentary after the March quarter results.
Although the company didn’t lower its guidance, it altered the language for its outlook, saying revenues for the year would be “approximately” $2.95 billion (Rs 12,508 crore). At the beginning of the year, it had said revenues would be “at least” $2.95 billion. The markets viewed this as a cut in guidance and the stock fell 10%.
The muted response to last week’s steeper cut in outlook suggests the worst is factored in. But the Cognizant management’s commentary may not be the last of the bad news coming in about IT spending. Almost all industry majors have said in the past month that they’ve had “client-specific” issues, and haven’t seen any broad negative trend. To some analysts, the fact that all major firms are together facing client issues is in itself a disturbing trend.
Credit growth accelerates in some sectors
The data in the Reserve Bank of India’s (RBI) review of macroeconomic and monetary developments provides a peek into those sectors of the economy that are seeing a rise in credit growth in the past few months.
(ON THE RISE) Interestingly, despite all the talk of a slowdown in credit to the housing sector, RBI data shows housing loans rose 13.8% as on 23 May, compared with an annual growth of 12% on 15 February. In absolute terms, too, the annual rise in bank credit was Rs31,735 crore on 23 May, against Rs26,930 crore on 15 February.
Contrary to popular belief, housing loan growth actually accelerated between February and May. Moreover, real estate loans showed a similar acceleration with its growth rate rising from 26.7% on 15 February to 31.9% on 23 May. Advances against credit cards went up from an annual increase of Rs6,502 crore on 15 February to an annual growth of Rs12,375 crore on 23 May. Loans to non-banking financial companies, which rose at an annual rate of 48.6% on 15 February, further accelerated to 62% on 23 May.
Among loans to industries, it’s noteworthy that lending to the small-scale sector had increased by Rs35,553 crore on 15 February and this annual increase was Rs60,398 crore on 23 May. It seems to suggest that banks have stepped up their lending to small industries in order to improve yields.
Unfortunately, this comes at a time when the economy is slowing and could result in more bad loans, since it is usually smaller companies that are the hardest hit during a downturn.
As expected, the annual increase in loans to the petroleum, coal products and nuclear fuels segment rose substantially, due to the increased credit requirements of oil companies.
Given the continued rise and indeed acceleration in credit growth during recent months, RBI had little option but to tighten monetary policy.
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