Bengaluru: Cognizant Technology Solutions Corp. did more new business, or added more incremental revenue, in calendar year 2015 than India’s three largest software firms, Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd, put together—a fact that underlines why last year was bad for the poster boys of India’s $146 billion IT outsourcing sector.
Nasdaq-listed Cognizant, which ended 2014 with revenue of $10.26 billion, and will report $12.41 billion in revenue for 2015, after the company last week reaffirmed its full-year guidance, will end up with $2.15 billion in incremental revenues in the January-December 2015 period. This is higher than the $1.96 billion in new revenues of the three largest home-grown IT firms. Mumbai-based TCS added $1.18 billion in new revenue, while Infosys did $570 million and Wipro, $211.5 million last year. Cognizant, which has over 150,000 of its 220,000 employees based out of India, will declare its earnings next month.
Some experts said that as more commoditized outsourcing deals have elements of digital technologies, including cloud computing and data analytics, this gap between Cognizant and home-grown IT firms will only deepen.
Cognizant was founded in 1994 as an IT services arm of Dun and Bradstreet Corp. and started operating as an independent firm only in 1996. TCS was founded in 1968, while Infosys was set up in 1981, the same year Wipro started selling computers.
Three key reasons, all linked, explain this development, according to experts.
First, Cognizant’s buyout of TriZetto Corp. for $2.7 billion in 2014 contributed to its growth. Although both Infosys and Wipro spent close to $800 million in buying six companies last year—in addition to the two Bengaluru-based firms also spending over $50 million in picking up stakes in start-ups focused on disruptive technologies—most of their acquisitions do not contribute much to their overall revenue.
“By my estimates, TriZetto commanded annual revenue of about $720 million, and Cognizant booked about $80 million in revenue from TriZetto in 2014 and an incremental $640 million in 2015. This means about $640 million of Cognizant’s revenue addition in calendar year 2015 is stemming from the TriZetto acquisition or inorganic revenue growth," said Rod Bourgeois, founder of DeepDive Equity Research, a US-based equity researcher.
Even minus the $640 million, Cognizant had incremental revenue of $1.51 billion, still higher than TCS’s $1.18 billion new revenue.
Second, Indian IT firms have grown at the slowest pace in more than six years even as Cognizant has continued to record good growth over the last few years. TCS is expected, at best, to grow at 8% in 2015-16. In calendar year 2015, TCS recorded 7.8% growth, Infosys 6.6% and Wipro 3%. This compares poorly with Cognizant’s 21% . Cognizant has been able to generate more business from clients in the banking and finance space (who typically spend the most on technology) even as Indian IT firms have struggled to scale up their business in this area.
A case in point: For TCS, big banks and insurance firms now account for a little over 40% of the total revenue, compared with 44% five years ago.
“Banks are the largest technology spenders and so BFSI (banking, financial services and insurance) is the largest industry for all IT companies. Banks are again emerging as the largest buyers of new technologies as they look to transform their operations. Indian tech firms have lagged until now in garnering a big share of this new tech spend, and so growth is slowing," said a Mumbai-based analyst at a domestic brokerage firm on condition of anonymity.
Some of the largest clients of Indian IT services companies, such as Cisco Systems Inc., have also cut their tech spending, further denting growth.
Third, more clients are looking at their IT vendors to help them transform their businesses. Technology vendors, which either have smart intelligent platforms that can process large data sets or which have a strong consulting practice to offer solutions that can potentially improve the way businesses are done by companies, are recording higher growth. Cognizant, analysts say, has invested in new-age technologies, including intellectual property led-platforms, ahead of home-grown IT firms.
“What we are seeing is the shift from human-based scale to digital-based scale," said Ray Wang, founder of Constellation Research Inc., a technology research and advisory firm. Wang said that though Cognizant seems to be the leader for now, the push by other Indian IT firms into a more platform-led approach should help bridge the divide by the “end of 2016".
To be sure, Indian firms have also started investing in smart technology platforms over the last year.
Still, this could be a year of change, say experts.
“India-based IT services market is facing multiple secular headwinds that will challenge the revenue growth of the top Indian services firms," said DeepDive’s Bourgeois.
“2016 is the year that will separate the service dinosaurs from the savvy cannibalizers, as revenue growth slides towards negative territory and the onus shifts from selling more buttocks on seats to maintaining sexy profit margins," added Phil Fersht, CEO of US-based HfS Research, an outsourcing-research firm.