After Wipro, Cognizant to zoom past Infosys too?

With clients restricting spending, demand for the IT sector seems to be slowing in the near term. This was more than evident in the disappointing results/outlooks of Infosys and Wipro.

Now, with Cognizant Technology Solutions, which has been consistently performing well over the past couple of quarters, moderating its full year 2012 growth guidance, those concerns will be heightened. The Nasdaq-listed services provider revised its 2012 revenue growth downwards from 23 percent earlier to 20 percent, citing "slower than anticipated acceleration in demand".

As expected Cognzant's cautionary stance has already put pressure on Indian IT stocks, among the top losers in the market on Tuesday, and dragging the 50-share Nifty in the red. While TCS is down 4 percent, Infosys is down 3 percent in morning trade.

[caption id="attachment_302112" align="alignleft" width="380" caption="Cognizant's lowered guidance will cast a shadow on the demand for the overall technology outsourcing sector. Reuters"][/caption]

Cognizant's lowered guidance will cast a shadow on the demand for the overall technology outsourcing sector, and could even lead to a re-rating of stocks of leading IT firms on Indian stock exchanges, analysts told the Economic Times.

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Like Infosys and Wipro, the company warned about lower discretionary spending by clients especially in the financial services segment."Due to a slower-than-anticipated acceleration in demand as we entered the second quarter, we are adopting a more conservative stance for the remainder of the year and revising our guidance to at least 20 percent revenue growth," said company CEO Francisco D'Souza, in a statement on Monday.

However, analysts believe Cognizant will continue to outperform rivals and beat its full-year targets. Morningstar Inc analyst Swami Shanmugasundaram sees the company continuing to outperform Infosys and Wipro. "Infosys is walking out of some of the client contracts because it wasn't willing to compromise, which should help Cognizant because its margins are lower," he told Reuters.

In the March 2012 quarter, Cognizant's revenue rose 2.9 percent to $1.71 billion from the previous quarter, the fastest among its peers TCS, Wipro, and HCL Tech. As Goutam Das of Business Today points out, "Cognizant's 20 percent growth guidance for 2012 is double of what Infosys anticipates it will generate in 2012/13. On Monday, Cognizant said it expects to grow its revenue to a minimum of $1.79 billion during the April-June quarter, while Infosys has said its revenues will be guiding in a range of $1.77 billion- $1.79 billion.The revenue gap between the two IT majors has been reduced to $59 million."

This means that after overtaking Wipro in terms of revenues, Cognizant is still likely to zoom past Infosys to become the second-largest offshore IT services provider.Moreover, even though Cognizant's projected guidance is a climb-down, it is higher than the 8- 10 percent guidance given by Infosys, and 11-14 percent growth guidance given by industry association Nasscom.

"Cognizant's chances of outpacing the IT bellwether are strengthened by the fact that in the last few quarters, Infosys has consistently failed to meet the top end of its revenue estimates, said an Indian Express report.

Unless Infosys goes for an acquisition in the next two quarters, Cognizant's revenues at the current rate of growth are expected to surpass its revenues at the end of 2012, said another report in the Business Standard.

Bernstein Research analyst Rod Bourgeois has another point: he said Cognizant added some extra conservatism to its revised 2012 forecast to avoid the risk of needing to revise the forecast again. The outlook has essentially been "de-risked" as the company is assuming less discretionary spending by its clients, he said. "I wouldn't be surprised if they come back and beat it (their outlook) at the end of the year.... They tend to be very conservative, like Infosys used to be in the past," he told Reuters.

The IT firm's net income during the March quarter rose to $243.7 million from $208.3 million, a year ago. Specifically, Cognizant said it was seeing weaker demand from financial services firms and pharmaceutical companies. However, the company's other segments made up and helped it beat its guidance target of $1.7 billion by about $11 million.