Why Cognizant's 23% growth guidance is hard to digest

When a company has made it a habit to deliver better than its guidance, the stock gets punished even if the company delivers on what it had promised. This is true in the case of Infosys, where the stock gets hammered every time the company delivers profit numbers in line with its guidance. Analysts had dubbed the company as being conservative in its guidance and expected the company to continue to overperform.

The same is true for Cognizant. The company, after eight quarters of outperformance, delivered a profit figure in line with what it had promised, yet the stock was beaten down in opening trades. It managed to recover a part of its loss and closed the day 1.75 percent lower at $70.75 on Nasdaq.

[caption id=“attachment_208173” align=“alignleft” width=“380” caption=“Cognizant reported a profit of $1.66 billion in line with its guidance, but marginally lower than analysts’ expectation of $1.67 billion. Reuters”] [/caption]

Cognizant reported a profit of $1.66 billion in line with its guidance, but marginally lower than analysts’ expectation of $1.67 billion.

What has again surprised the market is the guidance given by the company. Against an average 16 to 18 percent growth expectation for 2012, Cognizant has given a guidance for 23 percent growth. Analysts are finding that hard to believe as the guidance for the first quarter of the current fiscal is only 2.2 percent, which means that the company will have to grow by nearly 7 percent in each of the the remaining three quarters to meet its guidance.

This becomes even more difficult to digest as the company has said that it sees discretionary spending delays in Europe, particularly in life sciences and financial services verticals, two of the biggest contributors to the company’s topline. Further, the company expects budgets to remain flat to marginally higher in the US, from where it gets nearly 75 percent of its revenue.

The company, however, said there is a case for higher outsourcing from the US as the unemployment rate of people with college degrees is just 4 percent in the country, implying a shortage of local talent.

For Indian companies, Cognizant’s result imply that the first quarter of the current year will remain muted. As the contribution of Europe to Indian companies is much higher than that for Cognizant, Indian IT majors are expected to grow at a slower pace. The second half of the year, however, seems to be promising, as per Cognizant’s guidance. A dip in share price on poor results in the first quarter can give a better opportunity to capitalise on the high growth expected in the later part of the year.