What to watch for in Cognizant results5 min read . Updated: 05 May 2016, 07:40 AM IST
Infosys may end a 13-year drought and grow faster than Cognizant in FY17
Infosys may end a 13-year drought and grow faster than Cognizant in FY17
Bengaluru: Vishal Sikka versus Francisco D’Souza.
The year 2016 will see the bosses of Infosys Ltd and Cognizant Technology Solutions Corp. duel for supremacy.
At stake are billions of dollars in software contracts and the bragging rights for the title of the world’s fastest growing major software services provider.
Less than 21 months after taking over as the first non-founder chief executive of Infosys Ltd in August 2014, Sikka has marshalled his 35-year-old firm to industry-leading growth and regain the bellwether tag from larger rival Tata Consultancy Services Ltd (TCS).
Sikka’s next target: Cognizant, a company that’s based in the US but has most of its employees in India. Under Francisco D’Souza, the son of an Indian diplomat, Cognizant has set a scorching pace. The scale of the challenge for Sikka is best illustrated by the fact that Infosys has managed to grow faster than Cognizant only on four occasions since 1996, when the US firm started serving outside clients after being separated from Dun and Bradstreet.
By forecasting revenue growth of as much as 13.8% in the year to 31 March, it appears that Infosys is within striking distance of Cognizant.
In comparison, Cognizant said it expects to grow revenue between 10 and 14% in 2016 (Cognizant follows the calendar year). To be sure, Cognizant recorded 21% growth to end 2015 with $12.42 billion in revenue.
Infosys reported dollar revenue growth of 9.1% (13.3% in constant currency terms) to $9.5 billion in the year ended 31 March.
The last time Infosys grew faster than Cognizant was in 2002-03. And 2016-17 could be the fifth time—and the first after 13 years—when Infosys outpaces Cognizant.
Based on the numbers available and the management commentary from the two companies, here are three reasons why Infosys may beat Cognizant.
Firstly, Cognizant does not expect to record any growth in the January-March period when it declares its first quarter earnings on Friday. This means that Cognizant, which at the end of 31 March will have $3.24 billion in revenue, needs to do business of at least $3.47 billion in each of the three quarters ahead to end this year with $13.65 billion in revenue, a 10% rise over the year-ago period. This is a tall, if not impossible task. Things are not rosy for Cognizant; the January-March period will be the third straight quarter when the company’s sequential growth will lag behind Infosys.
Secondly, Cognizant does not expect robust demand for its services from banking and insurance firms. Worryingly for investors, the management is unsure by when demand from its banking, financial services and insurance (BFSI) clients will bounce back. In a double whammy, its healthcare clients too are holding back their tech spending as the industry is in the midst of a wave of consolidation. Together, healthcare and BFSI account for about 70% of Cognizant’s revenue.
Finally, because of these reasons, some analysts like Keith Bachman of BMO Capital Markets- who in January had warned of a lower growth rate in 2016 for Cognizant, expect the company to cut its growth forecast. “We believe that CTSH (Cognizant) will once again guide estimates lower for CY16, and we believe that the stock will move lower as a consequence. Further, we think CTSH has lost several deals to INFY (Infosys), which is affecting CY16 growth. Consequently, we are lowering our CY16 revenue growth expectations from 12% y/y to 10.5% y/y," Bachman wrote in a note on 1 May.
It is important to note here that Cognizant’s problems come even as Infosys aggressively chases new business deals and improves its ability to generate more business from existing clients by using a clutch of new initiatives, including the user-centric approach of Design Thinking and artificial intelligence and automation tools to better its software writing and maintenance work offerings.
Mint puts the spotlight on five things which will be watched when Cognizant reports its January-March results:
1. Will Cognizant cut its revenue forecast? BMO Capital Markets expects the Cognizant management to do so. If Cognizant does so, it will be in contrast to last year, when the company raised its guidance twice. Trimming the revenue growth forecast will mean that Teaneck, New Jersey-based Cognizant expects further pain in the BFSI space and the company does not expect its banking clients to outsourcing more work in the remaining nine months of the year.
2. What is wrong with Cognizant’s banking and insurance clients: Cognizant first flagged this issue of banks holding back their tech spending, on account of uncertainty about sustained global growth, in January. Since then, TCS has reported an impressive 3.2% sequential growth in constant currency terms from BFSI clients in the January-March period. Infosys did report a 0.3% sequential decline in BFSI segment but that was on account of a large insurance company outsourcing less work to the company. On 15 April, after Infosys declared its earnings, a senior executive told this paper that this decline was a “one-off" thing and the management expects healthy demand from BFSI. This means that Cognizant has client-specific problems. It remains to be seen if Cognizant will concede this and outline what steps it is taking to negate this weakness from a segment that brings 40% of company’s total business.
3. Are healthcare firms again outsourcing more work to Cognizant? In January, when Cognizant shared its October-December quarter performance, management said that it has a “healthy deal pipeline" and expected more work from its healthcare clients in the coming months. For this reason, Cognizant’s thoughts on the demand outlook from healthcare clients will be important.
4. Spending in Digital space: Earlier this year, Rajeev Mehta, Cognizant’s CEO of IT services, told this newspaper that the company does not see any softness in demand from clients looking to outsource work in cloud computing or analytics. Cognizant does not release revenue from these digital areas separately. One way to measure growth of Cognizant’s new offerings will be to see the growth in the consulting and technology business, which now account for 58% of its revenue, while the remaining 42% business comes from outsourcing work. At the end of 2013, Cognizant’s revenue split was about even.
5. Management commentary on buyouts: Cognizant’s last big buyout of TriZetto Corp. for $2.7 billion was in 2014. It helped the company add an incremental $640 million in revenue last year (Cognizant booked $80 million in revenue from TriZetto in 2014). This new business surely helped Cognizant, which added $2.15 billion in new business in the January-December 2015 period—more than India’s three largest software firms, TCS, Infosys and Wipro Ltd, put together. Now, Cognizant faces slow demand for its services from its existing clients. Management commentary on the company’s appetite for another large buyout will assuage concerns; spending cash to buy growth can help Cognizant cling on to its industry-leading growth in 2016.