Cognizant Technology Solutions Corp. has beaten its larger peers by a huge margin in the June quarter. The company has reported a 15.2% quarter-on-quarter growth in revenue to $1.11 billion (around Rs5,130 crore).
The top three firms in the sector grew revenues by just 5% last quarter. Cognizant, the fourth largest, reported incremental revenue of $145 million last quarter, the highest ever by any software services firm with Indian operations. At its peak in mid-2007, Tata Consultancy Services Ltd had reported incremental revenue of $138 million.
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Last quarter, Cognizant’s share of the total incremental revenue of the top four companies in the sector stood at around 41%. This is much higher than its share of 20% in the total revenue of these firms. Just two quarters ago, Cognizant’s revenue amounted to around 80% of Wipro Ltd’s information technology (IT) services revenue. Last quarter, they amounted to around 92% of Wipro’s IT business. At this rate, it could soon become the No. 3 in the industry.
Evidently, Cognizant is finding growth where other large Indian IT firms are not. For instance, its revenue in Europe grew by around 15%, at a time when most other firms have struggled in that region. The financial services business saw growth of 18.1% sequentially, which is far ahead of the other firms. Besides, while the other large firms have been talking of a pick-up in discretionary spend, Cognizant seems to have made the most of this opportunity. Revenue from application development services grew by 21.7% sequentially last quarter.
The company said on a post-results call with analysts, “The strength in application development was driven, in part, by pent-up demand resulting from clients having under-invested in their businesses during 2008 and 2009 due to the economic uncertainty.”
Along with the pick-up in discretionary spend, Cognizant also benefited from mergers and acquisitions-related integration work and projects related to regulatory compliance. The company said the June quarter was unique in terms of growth since many positive factors fell in place together, and the same level of growth cannot be expected in the second half of the year.
Even so, it has guided for a 36% growth for the year till December, the same level of growth it has managed in the first half of the year. While sequential growth rates may drop, the surge in revenue in the June quarter has taken it to a much higher base, from which even marginal sequential growth will result in high year-on-year growth.
The 36% growth target is around 10 percentage points higher than growth expectations for top Indian IT firms. This isn’t a new phenomenon. In 2009, Cognizant’s revenue grew by 16%, at a time when revenues of the top firms remained flat or fell marginally.
While it’s clear that Cognizant is ahead of the curve in capturing market share in the current environment, its results also indicate that the overall environment for IT spending is getting better. Other firms are also likely to gain, albeit with a lag, from the increase in discretionary spend. After all, many of Cognizant’s clients are also clients of other top IT companies.
This should aid valuations of Indian IT stocks in the near term, though it goes without saying that Cognizant will be rerated the most. Its shares were trading around 9% higher on Nasdaq in early trade on Tuesday.
Graphic by Ahmed Raza Khan/Mint
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