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IT does well in the new normal

IT does well in the new normal
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First Published: Tue, Aug 02 2011. 10 45 PM IST
Updated: Tue, Aug 02 2011. 10 45 PM IST
A look at the CNX IT (information technology) Index’s performance in the past month suggests that IT firms reported weak results for the June quarter. The index has dropped by 6% against a 3% fall in the Nifty. But while it’s true that the results of some firms were below expectations, it isn’t accurate to say that the industry has hit a rough patch. Consider the June quarter results of Cognizant Technology Solutions Corp., which has now overtaken Wipro Ltd to become the third largest outsourcing company out of India.
Cognizant reported an 8.3% increase in revenue compared with the March quarter and a 34.4% rise against the year-ago June quarter. These are very healthy growth rates. Its reported revenue of $1.49 billion (Rs 6,585 crore today) was about $35 million more than what the firm had guided for three months ago. And it has raised its annual revenue target by $135 million. In other words, it has raised its target for the second half of the current calendar year by $100 million.
Also See | Growth Path (PDF)
The company told analysts in a conference call that its sanguine guidance is based on current client expectations and factor in the uncertainty in the economy. It added the guidance “includes everything that we know today”, and that it has also accounted for the fact that growth recently has been driven by discretionary spend, which can get bumpy with the uncertainty in the economy. The annual revenue growth looks pretty at 32%, almost double the 16-18% growth rate industry body Nasscom is expecting for the year ending March 2012.
There were a number of other positives in Cognizant’s results. Application development revenue, which reflects discretionary spend by clients, grew by 10.6% sequentially, which is much higher than the company average. The plainer application maintenance work grew by 6%. Financial services grew by a healthy rate of 7.5% and healthcare, the second largest segment for the company, grew by 10.7%. The number of strategic clients increased by six and now stands at 179, and 76 new customers were added last quarter. And unlike most of its peers, Cognizant witnessed an improvement in pricing last quarter, with the benefit of price increases effected last year continuing to trickle in. It isn’t surprising that Cognizant’s shares rose 3% in early trading on Nasdaq after the results were announced.
The firm’s results reinforce the view among most analysts that the increasing uncertainty in the economy isn’t affecting underlying demand for IT. Cognizant’s chief executive Francisco D’Souza said that clients realize that economic uncertainties are the new normal and are investing in IT to be better able to adapt to the changes in business environment. This is also leading to an increase in the use of variable pricing models, output-based pricing and more managed services, with a view to scale up and down depending on the business environment.
To be sure, even Tata Consultancy Services Ltd reported healthy growth of 7.5% in revenue. Infosys Ltd, which reported growth of 4.3%, and Wipro, which reported flat revenue, are going through organizational restructuring pangs. As far as the underlying demand scenario for the industry goes, things seem to be still going strong. Of course, it would be foolhardy to assume that things will remain this way if the global economy goes into another slump.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Aug 02 2011. 10 45 PM IST