Cognizant Technology Solutions Corp. has scripted a smart turnaround in growth in the past three quarters. Organic growth in dollar terms rose to 15.6% year-on-year in the June quarter (Q2), from a low of 11.9% in the year-ago July-September quarter. In comparison, Tata Consultancy Services Ltd’s (TCS’s) organic growth in dollar terms has dropped from 14.7% to 6.5%.

The stark difference in growth in the past three quarters has reflected in valuations as well. Cognizant now trades at a marginal 2% premium to TCS, based on the one-year forward price-to-earnings multiple. Nine months ago, TCS shares were more or less at the same levels, while Cognizant shares were 28% lower.

What separates the two companies, and indeed, Cognizant from India-listed IT services firms? According to an analyst at a multinational brokerage firm, the US-based company has been ahead of the curve with its investments in the digital and automation space, areas that are now driving growth. The fact that it chooses to operate at relatively low profit margins helps it to sustain these meaningful investments, he adds.

Cognizant said that nearly all of its incremental revenues last quarter (vis-à-vis what it had predicted) came from discretionary client spending, or what it now calls the “run different" part of the business. The other “run better" part of the business continued to grow at a steady pace.

Chief executive officer Francisco D’Souza said on a call with analysts, “We (now) tend to compete most frequently with large global end-to-end providers that have both digital capabilities and outsourcing capabilities. We tend to compete much less with traditional offshore or India-based pure play, (which) I think of as run better firms. Although, certainly, they’re still an important factor in the marketplace and so on. But we’re increasingly competing more with the global multinationals, who have both the run better and the run different value proposition."

While some Indian companies may challenge this assessment, the numbers clearly speak otherwise. Analysts at JP Morgan wrote in a note to clients, “We think Cognizant’s traction reflects solid market share gains in ‘competition’ verticals, such as BFSI (banking, financial services and insurance), manufacturing and retail. Also, Cognizant is apparently doing well in the fast-growing digital space, where it invested early, has done several M&A (merger and acquisition) deals and built early leadership (though we are early days into the digital journey)."

Some of the growth differential is because of Cognizant’s low/negligible exposure to troubled sectors such as energy and utilities, and telecom. But again, it hasn’t been merely lucky—it has grown at a much faster pace in other industry verticals such as BFSI.

The only soft spot in the company’s results announcement was its guidance that it expects revenues to grow by merely 1.8% in the September quarter. Cognizant has said that a surge in M&A activity in the healthcare space could potentially impact its revenues—the segment accounts for 29% of total revenues, and it works with most large firms in the sector.

Most analysts believe Cognizant is being overly conservative. Be that as it may, the year-on-year growth will still be a healthy 14.8% if the company meets its guidance target. That’s far higher than where other top-tier Indian IT firms are. They need to do far more in terms of revenue growth to adequately respond to D’Souza’s snub that they aren’t Cognizant’s real competition.

The writer does not own shares in the above-mentioned companies.

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