Trouble Ahead For High-Flier?

08 Dec,2012 07:26 IST

Trouble Ahead For High-Flier?

Cognizant’s filing with the US market regulator sets off panic; while many see its growth slowing, the New Jersey-based company sees no reason to worry

Venkatesha Babu

Trouble Ahead For High-Flier?

NO WORRIES: CEO Francisco D’Souza feels CTS will stay ahead of rivals (BW Pic by R A Chandroo)

Is Cognizant’s turbocharged growth story losing steam? It seems so, if its recent filing with US market regulator SEC is anything to go by. In a routine — almost innocuous — filing, Cognizant Technology Solutions (CTS) said that in 2013 its senior executives would get performance-linked stock units if the company grew by 16 per cent, resulting in the BSE’s IT index falling by about 3 per cent. Performance-linked rewards are seen as a proxy for actual growth and market operators felt CTS saw market conditions worsening. 
Cognizant has been on a dream run over the past four years. The New Jersey-based IT services company, which has a majority of its 150,000 employees located in India, enjoyed a compound annual growth rate of 29.54 per cent, leagues ahead of TCS’s 21.54 per cent and 19.23 per cent of Infosys. Among its peers, only HCL Technologies was able to match the pace, at 29.5 per cent, albeit on a lower base. The Nasdaq-listed CTS, which follows the calendar year, had also projected that it would grow at least by 20 per cent to $7.34 billion this year, much ahead of most of its competitors and the industry average. At the beginning of the fiscal, industry body Nasscom had projected 11-14 per cent growth for the sector. But it revised it last month to the lower end of the band. That meant CTS in 2012 would have grown at almost double the industry average.
But CTS does not see any trouble ahead. Vice-chairman Lakshmi Narayan has clarified that the board had decided on one aspect of management compensation, which was not necessarily a guide to how it sees things evolving over the next year. It is expected to provide a detailed full-year guidance when it declares the third quarter figures and the company’s full financials for 2012 on 14 January. 
29% The compound annual growth rate of Cognizant in the past four years

However, there are a few concerns. “First, the company is spreading itself thin in areas outside its core strengths of BFSI and healthcare. Newer verticals such as utility, media and entertainment are yet to pick up traction,” says another analyst with a leading brokerage, adding, “second, its revenues from continental Europe are significantly lower than its peers, indicating its over-dependence on the US market.” 
Echoing Narayan is Sudin Apte, CEO and research director of IT research firm Offshore Insights. He says too much should not be read into the filing. “In last year’s filing, CTS had indicated a 23 per cent growth for executives, but it was later revised downwards to 20 per cent based on market conditions. I expect the overall IT services market to do better than it did in 2011 or in the current year.”
Apte, however, says unlike Infosys and Wipro, CTS is still in a better position. “Even if there is a slight slowdown, it will grow faster than the industry and one also has to take base effect into consideration.” It is not the small company it was five years back, says Apte, and “some moderation on a larger base is expected”.
CTS is confident and feels there is plenty of steam left in its growth story. Its CEO Francisco D’Souza has asserted that newer services around its SMAC (social, mobile, analytics and cloud computing) stack will continue to keep the company ahead of the competition. In a few weeks, when CTS releases its guidance for the coming year, it will be clear if its dream run is indeed losing pace, or if the industry itself has to worry about growth. Watch this space. 

(This story was published in Businessworld Issue Dated 17-12-2012)

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