Cognizant rings alarm bell for Indian IT services players

With Cognizant, which has so far remained insulated to the slowing trends, guiding a much lower growth in calendar 2016, the export-driven Indian information technology (IT) services sector has a major reason to worry. The Nasdaq-listed IT services company on Monday has given a revenue growth guidance of 9.9-14.3 per cent, one of its lowest so far, cautioning cut in spending by the clients in the financial services space as well as health care where a major consolidation of players is happening at the moment.

Interestingly, this is perhaps for the first time that Cognizant, which has been almost growing double the industry growth average, has given a guidance where the lower end is even trails than the outlook given by industry body, Nasscom. For CY16, Nasscom expects the IT services experts to grow between 10-12 per cent, lower than the previous year.

“I think their (Cognizant’s) issues lie in a few areas. First is the rapidly maturing industry in which growth rates are dropping for all firms. This is a secular trend that until now Cognizant has managed to defy, however, it now seems to be catching up with them as well,” said Peter Bendor-Samuel, founder and chief executive officer of consulting and research firm, Everest Group.

Just like Cognizant, all the major players in Indian IT services sector including Tata Consultancy Services (TCS) and Infosys are overly dependent on the banking, financial services and insurance (BFSI) space, which fetches them around 40 per cent of their overall revenues at an average. Health care, though Indian players are not as exposed as Cognizant which has been bolstering its presence in the segment with big bang acquisitions like Trizetto, most of the Indian players perceive this as a big area of opportunity, thus aggressively expanding their capabilities in the space.

“Clearly, the industry is in a maturing stage with growth slowing and pricing pressures increasing…If Cognizant, with its superb sales and account management capabilities, shows signs of slowing growth this suggests rest of the sector is also likely experiencing similar issues,” added Bendor-Samuel.

Ironically, in CY15, Cognizant has delivered yet another robust growth, both in terms of revenue, profit and profitability. At the beginning of the last calendar year, Cognizant had started the year with a revenue growth guidance of 19 per cent, which it revised thrice during the course of the year, to finally settle for 21 per cent. In CY14 also, the company raised its rather moderate revenue growth outlook couple of times to finally beat it by posting a growth of 16.1 per cent. This indicates that the “glass is rather half full than half empty” for Cognizant, said Tom Reuner, managing director for IT Outsourcing Research at HfS.

“Reading and interpreting the comments on earnings results feels like an esoteric form of art at times. Cognizant’s business model and execution have been the envy of many of its peers – it doesn’t come unstuck just overnight,” said Reuner.

“The cautious guidance on Q1 CY16 is in all likelihood caused by an intricate interplay of macroeconomic headwinds, consolidation in the US health care market and account-specific issues. While the issues around the Health Net contract are well documented, it is more difficult to pinpoint to challenges in financial services,” he added.

The export-driven Indian IT outsourcing industry is still not completely out of the difficult phase that started with the global economic slowdown in 2008, resulting in project cancellations, cut in spending by clients and large-scale employee layoffs. The management commentaries of top Indian IT services companies like TCS and Infosys in the just-ended quarter have also not been very positive even though the later looks more promising at the moment under the new management after showing strong performance for last few financial consecutive quarters.

The IT stocks have reacted quite sharply to Cognizant’s outlook, shedding the maximum during the intra-day trade on Tuesday. The BSE IT index was down close to 3.5 per cent with the share prices of most of the large companies losing well above three per cent during the intra-day trade on Tuesday.

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