Cognizant's lower guidance is bad news for Indian IT sector

Global market commentaries have largely focussed on the crisis in oil and emerging markets, while in India the discourse has largely been on FII outflows, and the trouble faced by banking and capital goods companies. A sector that has largely gone unnoticed was software. However, recent developments indicate that global volatility and slowdown has started affecting it.

Many of the internet stocks traded on the NASDAQ are trading at multiyear lows. Twitter for the first time in its history is trading below $15 a share, falling nearly 70 per cent in the last one year. The company is struggling to add new customers and is contemplating increasing the character limit from 140 to 10,000.

 

Silicon Valley based LinkedIn lost 43.6 per cent on Friday after hitting a three year low, following a sales forecast that fell short of analysts’ expectations. Similarly, Seattle based Tableau Software fell by 49.4 per cent in a day on reducing its profit forecast.  

The present results season has seen a number of IT companies globally posting poor numbers and coming out with a lower guidance. This issue in the industry has now reached Indian shores. US listed Cognizant Technology Solutions Corp’s in its December quarter numbers warned of a lower guidance going forward after the company missed its guidance. Cognizant directly competes with Indian IT companies for its business.

But even before Cognizant could warn of a possible slowdown, Indian software industry body Nasscom warned of a lower growth number. Nasscom estimates exports of Indian information technology (IT) services will grow at 12.3 per cent in constant currency terms in the current fiscal year which is at the lower end of its earlier guidance of 12-14 per cent. In dollar terms, industry export revenue will grow 10.3 per cent.

Nasscom blamed the uncertain macro-economic environment which is marked by volatility in equity and investment markets, currency fluctuations and political instability in global markets as well as higher visa fee in the US and the UK for the lower growth estimates. The industry body lowered the guidance for FY17 to 10-12 per cent, the slowest in the last six years. 

Cognizant, in its guidance was more specific in terms of areas which would see a slowdown. The company said that it would be affected in both its top two verticals – financial services and healthcare. Macroeconomic conditions have started having an impact on the financial vertical while consolidation in the healthcare industry is likely to impact revenues going forward in the sector. The company also complained of lower discretionary spend that is normally seen at the beginning of the year.

What has taken the market by surprise is the scale of drop in growth that Cognizant’s management expects. As against a growth of 21 per cent in 2015, the company is guiding for 10-14 per cent for 2016 (the company follows the calendar year for financial reporting).
 

If Cognizant is likely to see such a huge fall, naturally other Indian players will also be affected as most of them also derive a major chunk of revenues from the same verticals.

Edelweiss in a note on the results maintains a cautious stance on BFSI vertical due to macro weakness that will impact the entire IT sector. Companies like TCS and Infosys will face stronger headwinds due to high exposure of around 41 per cent and 33 per cent to BFSI segment.

IT sector results and guidance show how trouble in one sector is now percolating down to other parts of the economy.