Belcan growth uncertain as Trump administration looks to optimise federal spend

Belcan, which Cognizant acquired for $1.3 billion in June 2024, gets more than three-fourths of its business from commercial aerospace, defence and space, whereas 40% comes from US federal contracts. With the US Department of Government Efficiency (DOGE) led by Elon Musk clamping down on government spending, sectors that contribute to Belcan’s growth may suffer.

"The new administration clearly is committed to cutting federal spending," said Peter Bendor-Samuel, founder and chief executive of Everest Group. "The commitment to significantly reduce government spending will undoubtedly create a significant head wind for all government contractors including ER&D (engineering research and development (ER&D)," said Bendor-Samuel.

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Slower growth from clients looking to digitize core engineering operations further slows growth for companies like Belcan, which compete in the ER&D space.

“We believe Belcan is subject to industry headwinds across the aerospace and automotive industry which is pressuring growth versus pre-acquisition levels," said Keith Bachman, an analyst at BMO Capital Markets, in a note dated 5 February.

Cognizant’s revenue growth

At the time of the acquisition, Cognizant said the privately held company was expected to bring $800 million in full-year revenue.

"The revenue that the acquired business will contribute to Cognizant in 2024 will depend on the timing of the close but is expected to be over $800 million on an annualized basis," said Jatin Dalal, chief financial officer of Cognizant, in an analyst interaction dated 10 June after the company announced the Belcan acquisition.

Cognizant clocked revenue of $19.74 billion in 2024. In an analyst call in February, the company management said it expects Belcan to fetch 2.5% of this—or $494 million—in incremental revenue in the January-August period of 2025. This, plus the $300 million that Belcan already earned in the August to December period in 2024, would add up to $794 million—a shade below the $800 million it targeted at the time of the acquisition.

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The revenue from Belcan will be considered organic, or not part of an acquisition, after a year, that is after August 2025.

Cognizant expects a full-year growth of 2.6-5.1%, meaning it expects to earn $20.3-$20.8 billion in 2025. Going by the management’s guidance, Belcan would account for most of Cognizant's organic growth if the latter grows at the lower end.

“The federal business for Belcan could come under pressure as DOGE is looking to rationalize government expenditure, which means any provider focused on federal will see the impact," said a former Cognizant executive on the condition of anonymity.

Last year, Cognizant’s entire growth came on account of two acquisitions, including Belcan and Thirdera.

Cognizant in its 2024 earnings release said the two acquisitions brought 2% of its revenue growth.

Long-term growth potential

"As we mentioned on our earnings call, within our Products & Resources (P&R) segment, we have seen an impact from reduced discretionary spending in a few industries, including sectors where Belcan also has clients," said Cognizant in a mailed response to Mint's questions.

"Despite the near-term pressure in those industries, we are excited about the opportunities we see across P&R, where the convergence of Information Technology (IT) and Operational Technology (OT) is rapidly accelerating. Our acquisition of Belcan has significantly expanded our capabilities in these areas of IT and OT and we believe it will help us pursue growth opportunities across industries over the long term. We closely monitor US government spending and policy. We remain bullish on the long-term opportunity for aerospace in the next decade," said Cognizant in a mailed response to Mint's questions.

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Belcan, which brought 6,500 employees to Cognizant, is locked in competition with ER&D firms including L&T Technology Services Ltd and Cyient Ltd.

Ravi Kumar, chief executive of Cognizant, spoke at length about the growth prospects of ER&D in his 10 January interaction with analysts after the Belcan acquisition was announced.

“Over the next decade, we believe other more physical industries like manufacturing, automotive, and aerospace will significantly expand investment in digital technologies," said Ravi Kumar in the company’s post-Belcan acquisition call with analysts.

“The adoption of digital technologies and engineering is transforming business models as CXOs attempt to keep pace with innovative technologies. These trends are, in turn, driving increased demand for outsourcing to ER&D service providers because ER&D requires the use of highly technical and costly interfaces and programs," said Kumar.

This same ER&D may be now under strain.

“We believe opportunities outside pure-play ERD companies are more attractive in the near term," said Kotak analysts Kawaljeet Saluja, Vamshi Krishna, and Sathishkumar S. in a note dated 3 February. “The demand in the automotive vertical is likely to remain weak in the near term, with an uncertain recovery timeline due to a shifting industry structure. Deal closures would impact revenue growth for companies in FY2026E," the Kotak analysts said.