Cognizant results underline pall of gloom over Indian IT

Cognizant’s December quarter numbers would likely sound a warning bell to investors in Indian information technology stocks


Cognizant is looking at January-March quarter revenue in the range of $3.18 billion to $3.24 billion, which translates into a decline, or at best negligible growth sequentially. Photo: Mint
Cognizant is looking at January-March quarter revenue in the range of $3.18 billion to $3.24 billion, which translates into a decline, or at best negligible growth sequentially. Photo: Mint

Cognizant Technology Solutions Corp.’s December quarter numbers would likely sound a warning bell to investors in Indian IT stocks. After beating the Street estimates for several straight quarters, its December quarter revenue of $3.23 million fell short of analyst forecasts.

More pertinently—for the fortunes of Indian software firms—its guidance was lukewarm. It is looking at March quarter revenue in the range of $3.18-3.24 billion, which translates into a decline, or at best negligible growth sequentially. Secondly, for the whole year 2016, Cognizant is guiding for 10-14% revenue growth, a far cry from the 21% growth for 2015. It is also a much wider range than normal, implying a sense of uncertainty.

The company’s two largest verticals—financial services and healthcare—are the main reasons for the poor guidance.

In financial services, the management talked about macroeconomic uncertainty that has emerged, especially over the last couple of months.

While routine maintenance-type work is going on, clients have cut back on development-oriented projects. There is a certain amount of “discretionary stuff” which kicks off at the beginning of the year when budgets are approved, but that is being deferred this year, the management said.

In healthcare, a spate of mergers and acquisitions has led to short-term issues with client spending. However, the management said that it has a large pipeline of deals which would likely be closed in the second half of the year. It offered this as one reason for the larger range of its guidance.

While Cognizant’s earnings have delinked from Indian software firms’ results in the past few quarters owing to its large investments and focus on digital services, its guidance on client spending in financial services should alarm investors. After all, banking, financial services and insurance is one of the largest verticals for local firms.

To be sure, Cognizant has a history of conservative guidance. In the last year, it revised its forecast upwards after every quarterly result announcement. But investors are taking its current guidance at face value. The stock fell 7.6% in early trading. Infosys Ltd, whose American depository receipts trade on NYSE, fell 2.13% in what’s perhaps a sign of things to come when Indian markets open on Tuesday.

The writer does not own shares in the above-mentioned companies.

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