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Business News/ Opinion / Online-views/  Cognizant: slower growth ahead as pent-up demand already met
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Cognizant: slower growth ahead as pent-up demand already met

Cognizant: slower growth ahead as pent-up demand already met

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Last week, Nasscom said that the Indian IT-BPO (information technology-business process outsourcing) industry’s exports are estimated to grow by 18.7% in the year to March. Cognizant Technology Solutions Corp., which announced annual results on Monday, said that its revenue grew by 40% in the year ended December. The difference in growth rates was as much as 21 percentage points.

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Cognizant has been growing at a much faster pace than its peers for quite a few years now; but the gap widened in 2010. In 2009 and 2008, the difference in growth rates was lower at 10.5 percentage points and 15 percentage points, respectively. While most large-sized firms have outperformed the industry because of the trend towards vendor consolidation, Cognizant’s growth rates have been higher than large-sized peers as well.

The company has said that it expects revenue to grow by at least 26% in 2011, which, according to analysts, is quite conservative. Note that Nasscom has projected a growth of 16-18% for the year till March 2012. This represents a relatively low growth differential of 8-10 percentage points.

But while Cognizant seems to have been conservative to some extent with its guidance, it has also given some good reasons why growth this year may not be as high as in 2010. Last year’s performance was boosted to a considerable extent by pent-up demand in the system, since companies had curbed technology spending during the downturn in 2008 and 2009. While demand continues to be strong, as is evidenced from the company’s 7.7% sequential growth in the December quarter, there is no longer pent-up demand in the system. Given this backdrop, it’s quite unlikely that the company would beat its guidance estimates by a very high margin this year.

Since the beginning of the results season, shares of Cognizant and Tata Consultancy Services Ltd, the best performing companies in the sector, have been flat. Shares of Infosys Technologies Ltd and Wipro Ltd have declined by about 9%. Clearly, the December quarter results haven’t provided enough reasons to upgrade earnings estimates.Unfortunately for investors in IT stocks, Cognizant’s guidance also provides no reason for analysts to upgrade their growth estimates for Indian IT firms.

Graphic by Paras Jain/Mint

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Published: 08 Feb 2011, 10:03 PM IST
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