Computer services provider Cognizant Technology Solutions Corp. has reported a 16.4% growth in revenue to $3.3 billion (Rs15,378 crore) in the year ended December. In the same period, revenue for Tata Consultancy Services Ltd (TCS) was flat at $6.1 billion and Infosys Technologies Ltd’s revenue fell by 1.2% to $4.6 billion. In the year to December 2008, Cognizant’s revenue grew by 31.9%, compared with TCS growth of 15.1% and Infosys growth of 20.2%.
The trend is pretty much the same for the preceding few years as well, leading to a view that Cognizant’s growth rates are at least 10 percentage points ahead of other Indian information technology (IT) firms. With that backdrop, the company’s guidance of 20% growth in revenue for the calendar year 2010 is hardly exciting for investors in Indian IT stocks. Organic growth, i.e. growth stripped of acquisitions, is lower at 18%.
Graphic: Yogesh Kumar / Mint
Sure, Cognizant seems a tad conservative with its guidance. Its estimates imply year-on-year growth of roughly 25% in the first two quarters, and 16% growth in the second half of the year. Francisco D’Souza, president and chief executive of Cognizant, said in a conference call with analysts: “There remains uncertainty about the level of the new normal economic activity in our key markets. As a result, we have reflected that by taking a cautious view on the second half of 2010 until budgets are firmly locked down and our visibility to specific project work in the back half of the year improves.”
Some analysts feel the conservative estimate isn’t reflected in the firm’s aggressive employee addition numbers in the December quarter. On an organic basis, the company added over 8,000 employees last quarter, which amounts to about an 11% addition to its workforce. In other words, these analysts expect Cognizant to beat its guidance.
But it may be imprudent to expect a large outperformance. Gordon Coburn, chief financial and operating officer, said during the conference call: “Our guidance for 2010 includes conservatism for the second half but not the level of conservatism that we had coming into 2009.”
What does all this mean for Indian IT stocks? At current prices, investors are factoring in growth of around 20% in the next couple of years. While it’s true that growth in the coming year will be much higher, a 20% growth estimate seems like a stretch, based on Cognizant’s guidance. Industry lobby group Nasscom’s target of around 15% growth seems more achievable. This explains why Indian IT stocks were flat on Wednesday, despite the 6% rise in Cognizant’s shares on the Nasdaq on Tuesday.
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