Cognizant overtakes Wipro

Cognizant overtakes Wipro

Bangalore: Nasdaq-listed Cognizant Technology Solutions Corp. (CTS) turned in better-than-expected numbers for the quarter ended June and also, as it was expected to, overtook Wipro Ltd in terms of quarterly revenue for the first time.

CTS, which saw its revenue increase by 40% in 2010, expects growth in 2011 to be 32%.

“This is way ahead of investor expectations," Kaufman Bros analyst Sachin Jain said.

“During the downturn, unlike some of the other offshore tier-I peers, they invested heavily and probably they are still reaping the benefits," he said.

The firm posted revenue of $1.485 billion (Rs 6,563.7 crore today) for the quarter—around $35 million higher than its own guidance—against Wipro’s $1.408 billion, and, despite not being an Indian company in the strictest sense (it is headquartered in the US although most of its operations are based in India), strengthened its claim to being the third largest Indian IT services firm after Tata Consultancy Services Ltd (TCS) and Infosys Ltd.

Its revenue represents a sequential growth of 8.3%, ahead of TCS (4.7%), Infosys (4.3%) and Wipro (0.5%) for the same quarter, and is accompanied by a healthy operating profit margin of 19.8%. Top firms in India’s $76 billion software and services sector have flagged slowing revenue growth in the face of global economic uncertainties leading to lower customer spending.

The firm’s growth, according to R. Chandrasekaran, president and managing director, global delivery, is on account of “strategic decisions around a reinvestment philosophy, high-touch relationship structure, early verticalization, and focus on limited industries and geographies".

In terms of operating profit margins, Wipro (22%), TCS and Infosys (between 26% and 29%) are all ahead of the company, though Chandrasekaran said this was because the company manages its margins tightly between 19% and 20% “and reinvests anything in excess for faster growth, deeper differentiation and thought leadership". “In the 13 years of our listed history, we’ve not missed a beat on presenting operating margins in this range," he added in an email and a subsequent phone interview.

CTS shares opened at $72.71 on Tuesday, and were trading at $72.86 at 9pm Indian time, up 3.06%. The firm, which began its life in Chennai in 1994 as an in-house technology development centre for Dun and Bradstreet Corp. is, like other large Indian IT services firms, strongly focused on customers in the financial services business, but it also has a strong presence in other areas such as healthcare, retail, and media and entertainment.

Global IT and consulting firm Accenture Plc has long remained a model for India’s top IT companies, and CTS, too, has its eye on consulting. Though it does not provide a revenue figure for this practice, CTS has about 2,800 consultants globally.

In a call with analysts after results were declared, CTS chief executive officer Francisco D’Souza said the consulting business was progressing well. “We’ve some kind of consulting engagement with 40% of our customers," he added.

CTS posted a net profit of $208 million for the quarter, flat from the earlier quarter’s $208.3 million, because of the impact of increased wages. Most of CTS’ peers saw a far more substantial decline in their net profit.

Guiding for the September quarter, its third (it follows a January-December accounting period), CTS projected a 5.7% sequential rise, again higher than peers, to “at least $1.57 billion".

Revenue guidance includes the anticipated four-month impact of the acquisition of CoreLogic Inc.’s India-based captive operations.

Elaborating on its focused approach, Chandrasekaran said: “We are not everything to everybody. Our focus and discipline have helped us post industry-leading revenue growth, while enhancing high levels of client and employee satisfaction."

CTS has learned from its competitors, he emphasized.

“When we arrived on the IT scene in 1994, there were many established players in the industry. We learnt a lot from them. Having said that, we did differentiate ourselves with the customer as the primary axis. One good example is how we arrived at the operating margins of 19-20% in the 1998 time frame."

CTS at that time was looking at two types of competitors—the global system integrators (SIs), and Indian firms with margins ranging from 6% to over 30%.

“Global SIs were known for strong relationship management, deep domain knowledge and consulting capabilities, while Indian providers were known for lower cost, high quality and offshore footprint. We realized clients wanted the best of both worlds… We see our decision to maintain operating margins in the 19-20% range as a strategic advantage," Chandrasekaran added.

Reuters contributed to thisstory.