Bearish Cognizant guidance spells trouble for IT stocks

Though Cognizant beat its own growth guidance for the quarter ending September 2011, what has spooked the markets are its guidance numbers for the current quarter and the hawkish undertones. The IT index is trading nearly 1.7 percent down and is, the biggest loser in the market.

Cognizant saw a revenue growth of 7.8 percent on sequential quarters, well ahead of its Indian IT peers. While Indian companies had to take a hit on account of currency fluctuations, Cognizant had no such worries to handle as it books its revenues in dollars.

[caption id=“attachment_122434” align=“alignleft” width=“380” caption=“The company derives 78 percent of its revenue from North American market. Reuters”]  [/caption]

Higher reliance on the North American market has been one of the reasons for Cognizant posting a better performance. The company derives 78 percent of its revenue from this area as compared to 53 percent for TCS, 51 percent for Wipro and 65 percent for Infosys. A slowdown in European market has impacted Cognizant the least.

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The other reason is Cognizant derives nearly two-thirds of its revenues from the Banking and Financial Services Industry (BFSI) and Healthcare space, while they account for 40 percent for Wipro and 50 percent for TCS. Healthcare has grown by 11 percent, while BFSI has grown by 7 percent for Cognizant, two of the fastest growing segments for all companies.

A sequential guidance of only 2.8 percent for the December quarter however, due to seasonal issues, has dampened the momentum that might have followed the impressive results. Along with it was the statement that it seesmacro economic issues resulting in constraints and discretionary spends.

In their statements after announcing the second quarter results, most of the Indian IT companies have said that they have not seen any slowdown but are watchful of the situation. This statement from Cognizant raises questions on the growth of Indian IT companies in the second half of this year, especially Infosys, which was expecting to grow faster during this period.

Unlike TCS, Cognizant says that over the next two quarters they do not see a more than one or two big deals taking place. TCS during its conference call had said that the company is working on some bigger deals and expects to close them soon.

Based out of the US and being listed in that country, many observers view Cognizant’s statement as more accurate than those of Indian companies. Little wonder then that IT stocks fell after Cognizant announced its results.