Home / Markets / Mark To Market /  Cognizant’s outlook implies subdued demand, higher competition for IT

IT services company Cognizant Technology Solutions Corp. delivered better growth in the December quarter compared to forecasts. Constant current revenue grew 4.2% from the year-ago period. The full-year growth of 5.2% also exceeded its guidance.

The company, which follows a January-December fiscal year, had guided for 2-4% revenue growth in 2020. Management change, strategy rejig, client-specific issues and the exit of certain business accounts, which led to revenue loss, mean Cognizant’s growth rates were below par and strictly not comparable to Indian IT firms.

Nonetheless, the commentary on the demand environment is relevant for Indian IT. The macro-business environment is challenging but stable, the Cognizant management told analysts. Legacy and renewable businesses are facing pricing pressure.

Outlook for financial services, a key business vertical for domestic IT including Cognizant, remains muted. However, the region-specific commentary holds out hope. “While macro uncertainties persist we expect budgets in banking to be broadly stable in 2020 with North America relatively better positioned compared to the UK and continental Europe," said the management.

A large part of the banking, financial services and insurance business emanates from North America. Strength in US consumer spending and better revenue expectations of clients aided outlook. “We find the company’s (Cognizant) commentary of moderate pick up in North America banking growth interesting and consistent with our view," analysts at Kotak Institutional Equities said in a note.

The management expects weakness in the healthcare business to continue in this quarter, but growth to improve from Q2 onwards.

The commentary implies renewed aggression in building business and project pipeline. Cognizant is adding to its sales force and increasing marketing spends in 2020. Similar efforts over the past year are beginning to show results. Contract win rates are improving, the management told analysts.

It aims to improve growth rates in North America and emerging markets. The performance and strategy impressed investors, with the Cognizant stock gaining in US trading, but it will also mean heightened competition for Indian IT.

If the demand environment does not see noticeable improvement and Cognizant improves project win rates, it can slow order flows for local firms. “The internal restructuring of its costs and a more intense focus on sales in our view would mean that it would defend its share in 2020, which it had been losing to Indian tier-I companies in the last 24 months," Nirmal Bang Institutional Equities said in a note.

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