Early bet on digital pays dividends for Cognizant

Firm's 2015 growth target well ahead of sector average, for more than one reason; market share gains likely at others' expense

With a revenue growth guidance of 21 per cent for 2015, Nasdaq-listed information technology services company Cognizant has once again raised the bar for the Indian IT services companies.  Assuming the company meets the guidance, as it has rarely missed it in the past, the growth rate would be much higher than 13-15 per cent that was projected by industry body Nasscom for the year. For Cognizant, 2015 could mark the best growth in the past four years.

The US-headquartered company that competes with TCS and Infosys on Tuesday reported $3.19 billion in revenues, a year-on-year growth of 23.5 per cent, while its net profit at $397.2 million grew 11.4 per cent. Cognizant’s strong show and optimism could have been seen as a positive for the largely export-driven Indian IT outsourcing services segment but some experts also feel it could be gaining market share at the cost of home-based entities.

“This time, we think Cognizant’s traction also reflects solid market share gains in 'competition’ verticals, such as BFSI (banking, financial services and insurance), manufacturing and retail,” JPMorgan analysts Viju George and Amit Sharma wrote in a report on Thursday.

“Also, Cognizant is doing well in the fast- growing digital space, where it invested early, has done several merger & acquisition deals, and built early leadership.”

Cognizant's highest growth for the past few quarters has been in health care segment, where it has positioned itself enviably, especially after the acquisition of health care solutions provider TriZetto in September last year.

In the July-September quarter, health care was 29.5 per cent of the company’s overall revenue, at $939 million. That is a year-on-year rise of 433 per cent and sequential quarter growth of 4.7 per cent.

Which means the segment in itself is on the way to becoming a $4 billion-plus business for Cognizant.

“For most, Cognizant's Q3 (September quarter) results would be deemed solid, given a continued challenged macro environment. The focus on key verticals such as health care and life science is continuing to pay dividends,” said Tom Reuner, managing director for IT outsourcing research at HfS.

While the September quarter wasn't the best for Cognizant, as compared to the stellar performance of Infosys, what is noteworthy is its consistency in performance. For four quarters in a row, Cognizant has exceeded the market expectation. For example, in Q4 (October-December) of 2014, it beat the consensus estimate by $73 million; in the ensuing quarter (Q1, 2015), its revenue was at least $28 mn higher than the estimate. In Q2 and Q3 of 2015, it exceeded the consensus estimate by $65 mn and $32 mn, respectively.

“It is interesting that while Cognizant has continually upgraded its revenue growth outlook through this calendar year, we/the Street has been doing the reverse for India IT players (except Infosys). The revenue growth gap has opened in the past 12-15 months as (Cognizant) makes the most of aligning its business model to clients’ digital budgets,” added the JPMorgan report.

In revenue growth, Cognizant’s at 23.5 per cent in the September quarter was the highest, though in sequential terms it was Infosys which grew the most among offshore-centric IT service providers with a growth of six per cent.

What favours Cognizant?

 

* Early investment in digital business

* Selective acquisitions to fill capability gap

* Well-defined growth map

* Strong presence in high-spending heath care segment

* Lesser exposure to troubled sectors like telecom, energy & utilities