Cognizant's guidance for the December quarter suggests the sluggishness in growth will continue
Cognizant Technology Solutions Corp.’s September quarter results confirm outsourcing firms’ struggles with growth. It reported an average 2.6% sequential growth in revenues for the seasonally strong September quarter. Earlier, India’s top three outsourcing firms reported muted growth of between 0.2% and 2.2% in constant currency terms for the September quarter.
What’s worse is that Cognizant’s guidance for the December quarter suggests the sluggishness in growth will continue.
The key banking, financial services and insurance (BFSI) vertical grew by a lower 1.5% sequentially and only 3.8% year-on-year. The company said on a call with analysts that large banks continue to seek to free up dollars from their traditional IT (information technology) spend in order to invest in digital services. While Cognizant is engaging with these firms for their digital needs, the net outcome is clearly not satisfactory. Growth in the BFSI vertical is far lower than the company-average growth of 9.1% year-on-year.
Of course, another way to look at this is that other segments such as healthcare, and products and resources are making up for the poor growth in BFSI. In fact, Cognizant’s year-on-year growth is ahead of its Indian peers, which are growing in the mid-single digits. But this was more than adequately factored into its valuations, which have risen at a fast clip this year.
Also note that the financial services segment accounts for 38% of total revenues, and the weakness in the vertical is cause for concern, all the more because competitor Accenture Plc has reported higher than company-average growth in the banking segment lately. Investors are evidently worried—Cognizant shares were 4.4% lower at the time of writing.
Like most of its Indian peers, Cognizant made up for the sluggishness in revenue growth by optimizing on costs and improving margins by 70 basis points. However, as an analyst at a multinational brokerage firm points out, the management’s commentary on the post-earnings call suggests concerns on the margin front going ahead, which is another reason for the weakness in the company’s shares.
All told, Cognizant’s results provide little cheer for investors in the Indian IT space. Rather, they confirm concerns about growth, especially in the key financial services industry.