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Information technology stocks on Thursday felt the heat after Nasdaq-listed IT services company Cognizant cut its annual revenue growth forecast (‘guidance’) for 2014 to 14 per cent from the earlier stated 16.5 per cent, citing client-specific issues and delay in closures of some large deals.
Most IT stocks, including those of Tata Consultancy Services (TCS), Infosys and HCL Technologies, were down at the end of the day’s trading. The BSE IT index fell 1.3 per cent on a day when the market was largely flat. Infosys’ share price declined 1.7 per cent, HCL by 1.6 per cent and Mphasis by 1.4 per cent. Sector leader TCS, which had shown a healthy set of numbers in the just ended financial quarter and had given a strong forecast, also saw a 1.6 per cent drop.
| THE COGNIZANT TREMORS |
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Apart from Cognizant’s lower annual guidance, what has disappointed the market most is the US-based company’s quarterly revenue expectation of 1.3-2.5 per cent for the July-September quarter, lower than that given by industry peer Wipro for the same period. For the quarter ending September, Wipro has said it expects two to four per cent growth for its IT services business.
Sector analysts, however, are hopeful, feeling Cognizant’s problems are company and client-specific. For example, it saw a decline in UK revenues because of delay in finalisation of budgets by two of its large retail clients. Yet, most Indian IT services companies have fared well in Europe and in Britain, owing to a different client mix.
“Near-term weakness in demand (as faced by Cognizant) is not an industry-wide issue,” equity analyst firm IDBI capital said in a note. Analysts also say that going by its outlook of a 1.3 – 2.5 per cent sequential growth for the July-September quarter and revenue growth expectation of 14 per cent for 2014, Cognizant needs to grow only 0.5 per cent sequentially in October-December, its financial year’s fourth quarter. “Although (Cognizant’s) overall demand commentary was positive, a longer sales cycle and weakness in outsourcing could impact the growth for Indian IT companies, given the fairly high client overlap,” Religare Institutional Research said.
On Cognizant cutting its revenue forecast by citing client-specific issues and elongated sales cycle in large integrated deals, “we note a similar situation was witnessed by Infosys in the March quarter, which highlights that even though overall demand environment remains positive, client-specific challenges may put a spanner in the works,” added equity research firm Barclays.
Cognizant’s numbers are often considered an indication for the entire sector, due to its high exposure to the key North American market. Hence, it is believed to better understand the pulse of clients. Besides, the company follows the same offshore-centric delivery model as many Indian entities do, with huge offshore delivery centres in India.
“CTSH’s (Cognizant) revenue growth in the past was used as a good proxy to determine revenue growth for Indian IT companies. The company’s revenue growth has exceeded TCS by an average 11 per cent in the past seven years. However, CY14 will be the first year where TCS is likely to beat CTSH’s revenue growth,” said IDBI Capital.
In the April-June quarter, Cognizant’s sequential revenue growth of 3.9 per cent was next only to TCS, which grew at 5.5 per cent. However, it was well above Infosys’ two per cent and Wipro’s 1.2 per cent.
“CTSH results indicate divergence in the performance across Indian IT companies…Companies with full services integrated model, in our view, are leading growth in the sector, with overall steady demand environment,” said JM Financials.
