Cognizant Technology Solutions Corp. said that its board has set a revenue growth target of 16% for 2013, which will be used as a base to determine whether its top executives will earn 100% of their equity incentives for the year. In recent years, this growth target has been very close to the revenue growth forecast the company issues in the month of February.
What does this mean for the Indian information technology (IT) industry? For a number of years now, Cognizant’s annual growth has been around 10 percentage points higher than that of the rest of the industry. In 2012, too, the company expects to grow revenue by 20%, nearly double the rate at which the Indian IT industry is expected to grow. Does this mean the outsourcing companies based in India will grow by only around 6% in the next fiscal year?
Without getting into numbers, it’s evident that investors expect growth expectations to be toned down. The National Stock Exchange’s CNX IT index fell by 1.3% on Wednesday, on a day when the broad markets (S&P CNX 500) rose by 0.2%.
Unsurprisingly, the laggards were Infosys Ltd (-2.2%) and Wipro Ltd (-1.8%), with Tata Consultancy Services Ltd (-0.1%) and HCL Technologies Ltd (-1.4%) falling by a lesser degree.
There has been a wide divergence in the performance of Indian IT firms in the past couple of years, and investors seem to be concluding that a drop in growth rates in 2013 will hurt the laggards more. In 2012, Infosys and Wipro are growing by only 5-6%, while their main competitors have managed to report double-digit growth numbers.
Coming back to Cognizant’s growth target, it’s interesting to note that the 16% target implies a compounded quarterly growth rate of nearly 4%, which is in line with the growth the company has recorded in 2012 so far. A report dated 29 October by analysts at JPMorgan had stated that 2013 is likely to be a better year for the Indian IT industry compared with 2012 because of a host of reasons: a) discretionary spend is likely to rise; b) large, legacy contracts are opening up for renewal/restructuring; c) stability of client budgets; and d) the industry is at the low end of a cyclical turn currently, but at the cusp of an upward move.
Having said that, Cognizant’s decision to set the revenue growth target 4 percentage points lower than its current year’s growth performance suggests otherwise. Some analysts say that the company may have decided to be conservative, since it had to lower its growth forecast by 3 percentage points in 2012. But even if that is the case, the company is not likely to outperform the base target by a huge margin.
In this backdrop, the recent conservatism displayed by investors is justified—IT stocks have underperformed the broad markets by around 30% this year, after outperforming by a handsome margin in the preceding two years.