Cognizant results encouraging for Indian IT sector investors

Cognizant Technology Solutions Corp. has bounced back in the June quarter, after having disappointed investors with its March quarter earnings announcement three months ago. Revenue grew 4.9% sequentially to $1.8 billion, despite cross-currency headwinds. Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd, which are among the better performing large information technology (IT) companies, had reported sequential growth of 3% last month.

Investors in Indian IT stocks will be encouraged with Cognizant’s results and commentary. The company said its average pricing was stable, and that the industry has been disciplined with pricing by and large, except for aggressive price-based competition for infrastructure management services. This will allay some of the concerns on the Street that the tough macro environment is leading to large price cuts. The company also maintained the full-year revenue target it set three months ago, despite increasing challenges in the macro environment and adverse cross-currency movements. After the soft March quarter earnings and the ensuing subdued commentary, the June quarter results are certainly heartening. It isn’t surprising that Cognizant’s shares started trading about 11% higher on Friday on the Nasdaq.

The company had said after its March quarter results announcement that large banking clients in North America are reining in IT spends and have gone slow on discretionary spending. In the June quarter, it said that the banking segment experienced a modest rebound. Revenue from the banking and insurance segments together rose 6.1% last quarter. Similarly, pharmaceutical clients, which had cut spending in the March quarter, were more stable this time around. Revenue of the healthcare segment grew 3.6% last quarter.

For the next two quarters, the company expects revenue to grow 4.5% sequentially in each quarter, and expects revenue to grow by at least 20% in the year till December 2012. While IT results so far have been largely disappointing, Cognizant’s earnings give the impression that things may not be so gloomy after all. Shares of Infosys Ltd and Wipro Ltd rose by more than 2% on the Nasdaq after Cognizant’s earnings announcement.

Even so, Cognizant’s results and the ensuing commentary make clear that the environment is tough and the companies that are doing well are doing so at the expense of others by gaining market share. The company said on a call with analysts that it is quite unlikely it will beat its annual revenue growth target of 20% by a significant margin, as it has done in the past few years. But then, investors have made this trade months ago—with TCS and HCL Tech shares having outperformed those of Wipro and Infosys by 20-30% in the past year.

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