Cognizant executive pay in 2013 hints at 16% revenue growth4 min read . Updated: 05 Dec 2012, 11:36 PM IST
The suggestion of slower revenue growth from Cognizant could reflect a challenging year ahead for IT industry
Bangalore: A Cognizant Technology Solutions Corp. regulatory filing on compensation details of top executives appears to indicate revenue growth of around 16% in 2013, slower than the 20% pace expected to be set this year.
For India’s $100 billion (nearly ₹ 5.5 trillion) information technology (IT) industry, the suggestion of slower revenue growth from Cognizant would reflect a challenging year ahead. Cognizant is listed on the Nasdaq and based in New Jersey in the US, but traces its origins to Chennai and has most of its employees in India.
In a year during which industry lobby Nasscom has projected muted 11-14% annual growth in software exports from India, Infosys Ltd has forecast revenue growth of just 5%. Over the past few years, Indian IT firms have lagged behind Cognizant in revenue growth by anywhere between 8% and 20%.
Now, with Cognizant forecasting lower growth, experts tracking the sector and executives at rival firms have raised concerns about the prospects ahead.
The filing pulled down shares of Indian technology firms on the BSE IT index, which dropped 1.22% on Wednesday. Shares of Infosys closed 1.93% lower at ₹ 2,382.30 on BSE. Shares of Tata Consultancy Services Ltd (TCS), the country’s largest software exporter, were marginally down at ₹ 1,297.15.
To be sure, the filing on executive compensation isn’t a formal forecast, which will be made in February next year when Cognizant announces full-year earnings. But it does provide a sense of what to expect from the company in terms of future growth. Cognizant follows a January-December accounting period.
“They (Cognizant) are clearly a bellwether now. They will soon realize the perils of it when even a percentage lower growth rate can bring the stocks down," said a top executive at one of the large Indian tech firms. He requested anonymity because he didn’t want to speak publicly about Cognizant.
After Infosys, India’s second biggest software exporter, stopped giving any quarterly revenue guidance from March this year, Cognizant became the only one of its peers to provide annual and quarterly earnings forecasts. For experts and investors tracking the sector, Cognizant’s forecast of its earnings is now becoming an indication of the demand ahead. The firm, which isn’t listed in India, has its shares traded on the Nasdaq.
The Cognizant stock was trading up 2.64% at $68.91 on the Nasdaq at 8.30pm in India.
In the Form 8K filed with the US Securities and Exchange Commission on Tuesday, Cognizant said its top executives—chief executive Francisco D’Souza, president Gordon J. Coburn, group chief executive for industries and markets Rajeev Mehta, group chief executive for technology and operations Ramakrishnan Chandrasekaran, chief financial officer Karen McLoughlin and senior vice-president Steven Schwartz —will receive 100% of their performance-based stock units only if the company achieves 16% revenue growth in 2013 to $8.515 billion. They won’t receive any performance-linked stock units if the company doesn’t expand its revenue by at least 12% in 2013.
In November, Nasscom said the industry would meet the lower end of its 11-14% growth guidance and achieve at least double-digit growth in fiscal 2013.
Earlier this year, Cognizant lowered its revenue growth forecast for 2012 from 23% to 20%, citing macroeconomic uncertainties. Analysts tracking the company said this resulted in a more conservative forecast from the company for the year ahead.
“This may well be more conservative than normal, given Cognizant’s experience in 2012," JPMorgan analysts Viju K. George and Amit Sharma wrote in their note after the filing.
“Cognizant’s goal is to maintain industry-leading revenue growth. We believe that the 8K filed today containing the equity compensation targets for our executives set forth by our board aligns well with this goal, and the revenue target at 100% payout would represent industry-leading growth," said a Cognizant spokesman in an email reply. “Based on the current knowledge of the economic context and business demand, coupled with the discussions we have had with our clients, we think the targets are appropriate."
Analysts such as David J. Koning, Timothy Wojs and Nathan J. Novak of US-based Robert W Baird and Co. had expected Cognizant to set a 15-16% revenue growth target for 2013, lower than the 23% target set for 2012.
Cognizant competes with India’s biggest software outsourcing firms, including TCS and Infosys, for business from top customers such as Pfizer Inc. and UBS AG. Over the past 13 quarters, Cognizant has grown its revenue faster than Indian rivals TCS, Infosys and Wipro by an average margin of 3.4%, according to brokerage firm Jefferies and Co. Inc.
Clearly, for brokerage analysts tracking the global software outsourcing sector, any hint about future demand for services is considered important.
“Over the last three years, the 100% performance threshold has been a good indicator of initial out-year guidance (guidance generally in line to 3% higher than initial threshold)," the Baird analysts said.
But some analysts such as George and Sharma of JPMorgan said this actually means more stability in terms of future demand for the Indian IT sector.
“The industry demand is likely stable and not falling off by any means; polarization in performance is still the order of the day. The usual suspects such as Cognizant, TCS, Accenture and HCL (selectively in infra management) are likely continuing to win market share as has been the case," the JPMorgan analysts said.
For Cognizant executives, the new bellwether status means more scrutiny and hardly any room for slowing down revenue growth.
“It’s nice to be called a bellwether, but it’s equally frightening to imagine what happens when you slow down—Infosys and Wipro show that," said a Cognizant executive who requested anonymity because he was not authorized to speak to the media.