Exactly a year after Cognizant overtook Wipro as the third largest software exporter from India, the New-Jersey based IT firm has now overthrown Infosys as the second largest IT player after TCS in revenue terms in the June quarter.
The software company reported a revenue of $1.79 billion (about Rs 9,938 crore) for the April-June quarter this year. The revenue of Infosys for the same period was $1.75 billion (about Rs 9,716 crore). However, the company has to wait till the end of the financial year to see whether it can really cement its place as the second largest IT services provider.
But with a bullish annual revenue outlook, Cognizant may remain at the number two spot as Infosys has given a muted guidance of 5 percent growth for the year, given the uncertainty in the global environment. Infosys expects revenues to be $7.343 billion in FY13.
Cognizant, most of whose employees are in India, has been gaining ground over Infosys and Wipro as it has traditionally worked with relatively lower margins, helping it win more contracts. The company entered into a $330 million deal in June with the US unit of Dutch insurer ING Group NV to expand the business process management contract between the two.
“Cognizant, reiterating its guidance of at least 20 percent growth in this environment, shows that it’s in a different league compared to the likes of Infosys and Wipro,” Morningstar analyst Swami Shanmugasundaram told Reuters.
Its quarterly revenue topped Infosys’ for the first time partly due to a revival in technology spending in the financial sector.
Secondly, the company’s strategy of reinvesting in the business over a long period of time seems to have paid off. Cognizant is reinvesting a part of its operating profit back in the business, thereby intentionally keeping profitability at a relatively lower level.
Cognizant added six new strategic customers in the quarter, including Philips Electronics NV.
Cognizant CEO Francisco D’Souza said, “Clients continue to turn to Cognizant to help reinvent their business models in the face of secular industry changes, evolving demographics, and a new stack of social, mobile, analytics, and cloud technologies.”
Analysts on an average estimate that it would continue to maintain its lead over Infosys even in the next quarter. For the September quarter, Cognizant anticipates its revenues to be at least $1.875 billion, while Infosys is expected to clock $1.81 billion. Secondly, Infosys has not given any quarterly guidance for the first time, citing an uncertain environment.
For 2012, Cognizant maintained its outlook for revenue to be at least $7.34 billion (at least 20 percent higher compared to 2011) despite a negative impact of currency movements, overtaking Nasscom’s growth guidance of 11-14 percent. For the year ending March 2013, Infosys expects to grow just about five percent.
The IT sector has been anxious about growth prospects in 2012, amid a rickety pace of economic recovery in the US and the debt crisis in Europe which has forced clients to cut costs. But despite a difficult environment, TCS and Cognizant have emerged clear winners, while Wipro and Infosys have remained laggards.
Cognizant President Gordon Coburn said in a statement, “Cognizant once again delivered industry leading growth despite a challenging macroeconomic environment. This market downturn, as with those before, is serving as a catalyst for clients to embrace a broader range of our services.”
Even though North America and Europe account for over 90 percent of Cognizant’s revenues, D’Souza in an interview with Forbes, said smaller markets of India, Australia and some other Asian Pacific countries were increasing their portion of revenue. “Those smaller markets saw revenue rise 16 percent quarter over quarter and 45 percent year over year,” D’Souza said. Also , D’Souza believes in thinking long-term. “Despite the bumpiness and lumpiness we are seeing in Europe, it is attractive as it is under-penetrated,” he said in an interview with Mint.
Moreover, even though quarterly revenue growth declined from their European clients, it rose a bit on the year, suggesting that Cognizant has managed to find niches within the market, especially in the social media and cloud networking space, the report said.
“You have got these two big forces that are impacting clients. And what that means from a Cognizant stand point is it’s no longer business as usual. You should be able to relate to the client on an industry basis, on a management consulting basis,” D’Souza is reported as saying in the Economic Times.
Another area where Cognizant surpassed Infosys was in the hitherto troubled financial services vertical which contributes the largest chunk to revenues. But retail and manufacturing continued to post even stronger gains, up 7 percent from the first quarter. Cognizant’s revenue from financial services clients grew 6 percent sequentially, while Infosys saw a sequential decline.
“Amongst the top tier Indian vendors, TCS gains the most from these trends and is our top pick with a target price of Rs 1,450. Cognizant’s 2H CY12E (i.e. July-December 2012) guidance of 4.4 percent indicates that growth will be spread evenly across the year. This is largely on account of a greater proportion of revenues from application maintenance projects and large deal wins,” said Deutsche Bank Markets Research in a note today.
While the company’s comments of stable growth and pricing discipline is sure to cheer investors and allay fears of large price cuts , the environment is tough and the companies that are doing well are doing so at the expense of others by gaining market share.
As an HSBC report said today, Cognizant Technologies results add some positivity to an overall relatively muted quarter from the global technology sector. However that growth is likely to be restricted to a few companies and overall sector growth will be highly correlated to the macroeconomy and pick-up in overall technology spending.