The National Stock Exchange’s CNX IT index has risen by 12% since Infosys Ltd reported better-than-expected results about a month ago. While news flow from the information technology (IT) sector hasn’t been negative since, it hasn’t been upbeat either. It’s time investors questioned the recent rise in the valuations of IT stocks.
Cognizant Technology Solutions Corp. is the latest in the sector to announce unremarkable results for the December quarter. Revenue rose by 17.1% year-on-year, lower than the 18.2% growth recorded in the September quarter and the growth of 22.8% in the first six months of last year. What’s more, the company has guided for organic revenue growth (i.e. adjusted for acquisitions) of 15.8% for 2013, markedly lower than the 20% growth it managed in 2012. Earlier, market leader Tata Consultancy Services Ltd (TCS) had reported a meagre 1.25% sequential growth in volumes for the December quarter.
Cognizant did mention on an earnings call with analysts that it had learnt from the mistake it made last year (of being relatively aggressive with its revenue growth guidance, only having to temper it down in the middle of the year). Most analysts are seeing this as a sign that the company is now being conservative with its guidance. Even so, investors in Indian IT stocks should question the current belief that growth in fiscal year 2013-14 will be higher than in 2012-13. Cognizant’s March quarter guidance shows that it expects a slow start to the year, with organic revenue expected to grow by only 2% sequentially. This implies a compounded quarterly growth rate of 4.5% in the remaining three quarters—this can’t be termed as conservative in the current demand scenario.
With the annual guidance, the company has been particularly conservative with its estimates on discretionary spending. In the December quarter, revenue from application development services (or consulting and technology services) grew by just 1.5% sequentially and by 15.2% from a year ago. Even the results of Accenture Plc and SAP AG have tempered expectations on discretionary spending.
Commentary from companies listed in India, however, has been much more positive, with TCS even saying that growth in 2013 is likely to be better compared with 2012. In this backdrop, it’s likely that industry body Nasscom will guide for an increase in growth rates for FY14. But investors will do well to also factor in signals coming from outsourcing firms based outside, and apply some amount of caution while valuing IT stocks.