The results of Cognizant Technology Solutions Corp. for the June quarter were way ahead of expectations, with the reported earnings per share being 27% higher than consensus estimates. The company’s shares rose by nearly 10% in early trade on the Nasdaq in the US on Tuesday, but those of rival Infosys Technologies Ltd were flat.
Shares of information technology (IT) firms listed on Indian exchanges such as Infosys and Tata Consultancy Services Ltd (TCS) have risen at a faster pace compared with Cognizant since their June quarter results were announced in mid-July. Little wonder Cognizant’s shares are playing catch-up, especially on the back of strong results.
On a like-to-like basis, that is, adjusted for the higher number of working days, the company’s volumes grew 2% and average pricing fell by less than 1%. Revenues grew 4% and operating profit grew by nearly 10% sequentially. This beat TCS’ 7.9% growth in operating profit in dollar terms. Infosys and Wipro Ltd’s growth was even lower.
The relatively higher growth in profit was possible thanks to better employee utilization, but largely owing to economies of scale as far as selling, general and administrative (SG&A) expenses go. SG&A expenses have been flat at around $167-170 million (Rs793-808 crore) per quarter for the past five quarters, although revenues have grown by 13% during this period. As a percentage of sales, therefore, SG&A expenses have come off sharply, especially on a year-on-year basis, although at around 22% of revenues, they still continue to be the highest in the industry.
Cognizant has raised its guidance by $40 mn for the whole year, only $16.6 mn came from the outperformance in the three months to June. Graphics by Ahmed Raza Khan / Mint
IT investors in general are likely to be enthused by the positive statements made by the Cognizant management. It said demand for global IT and business services has stabilized and that for the first time since the December quarter of 2007, application development spending grew at the same rate as application maintenance in the June quarter.
While it’s too early to say if the trend will continue, it’s heartening to note that clients are back to making decisions related to discretionary spending. Cognizant’s clients are also ramping up business at a faster pace compared with earlier this year and are responding to cross-selling initiatives of the company better.
The company has clarified that there are no one-off large projects that drove the outperformance last quarter. To be sure, while it has raised its guidance by $40 million for the whole year, only $16.6 million came from the outperformance in the three months to June. The rest is from higher business expected in the September and December quarters. But adjusted for cross-currency benefits, the upward revision is just marginal and reflects some caution on the company’s front. More importantly, the profit guidance has been raised materially by about 9%.
This, coupled with positive statements made by the company management on its earnings conference call with analysts bode well for Indian IT stocks. But note that these shares have already risen sharply in recent months. Besides, Genpact Ltd, a leader in business process outsourcing, announced on Tuesday that it had lowered its annual revenues growth guidance “in light of the environment of continuing delays and uncertainty, and based on the trends in the second quarter that we believe are likely to continue”.
Just as Cognizant has exercised some caution in raising its guidance estimates, investors would do well to exercise caution with IT stocks.
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